What is the Rule of 40?
The Rule of 40 says a healthy SaaS company's revenue growth rate plus its profit margin should be at least 40. A company growing 30% with a 15% margin scores 45 and passes.
It is shorthand for the growth-versus-profitability trade-off. You can grow fast and burn, or grow slowly and profit, but the two together should clear 40.
The Rule of 40 formula.
Rule of 40 score = revenue growth rate plus profit margin, both as percentages. Margin can be EBITDA, operating, or free cash flow margin. Pick one and apply it consistently.
A score of 40 or more passes. The further above, the stronger the balance.
A worked example.
Your revenue grew 30% year over year, and your EBITDA margin is 15%. The score is 30 plus 15, which is 45. You pass the Rule of 40.
What is a good Rule of 40 score?
40 is the bar. 30 to 40 is close but under, and usually means trading too much growth for margin or the reverse. Below 30 signals the growth and profitability mix is under real pressure. The best public SaaS companies score well above 40.
Which margin you use changes the score, so be consistent. An EBITDA-based score will differ from a free-cash-flow one, and investors will ask which you used.
How to improve your Rule of 40.
Lift the growth side or the margin side. The cheapest way to lift growth without crushing margin is a channel that does not scale cost in lockstep with output.
Organic search is that channel: it grows pipeline while its cost per result falls over time, which helps both halves of the score. See how we drive efficient SaaS growth.