Rule of 40 SaaS Calculator

Compute the Rule of 40, a popular SaaS benchmark that balances growth and profitability. Enter your annual revenue growth and profit margin to see whether you meet the “40%” threshold.

Why the Rule of 40 Exists

SaaS companies face a strategic tradeoff that almost no other business model sees as sharply: should you reinvest heavily to grow fast, or should you slow down and harvest profits? Because SaaS revenue is recurring and retention can be strong, a company can justify years of investment before profitability. Yet investors still need a compact way to judge whether a company’s performance is healthy relative to its stage. The Rule of 40 emerged as that compact check. It is not a law of physics; it is a heuristic that says a SaaS company is “balanced” if the sum of its growth rate and profitability margin is at least 40%.

Why a sum? High growth can compensate for low profitability because the company is presumably building a large future revenue base. High profitability can compensate for slower growth because the company is already throwing off cash. A Rule of 40 score below 40% does not mean a company is doomed, but it does mean the company must explain why it is sacrificing both growth and margin. A score well above 40% usually indicates strong product‑market fit and efficient operations.

What Goes Into the Rule of 40

The metric has two inputs:

• Revenue growth rate. Usually year‑over‑year (YoY) revenue or ARR growth.
• Profitability margin. Most commonly EBITDA margin, operating margin, or free cash flow (FCF) margin. Choose one consistent margin and use it over the same period.

Growth is expressed as a percent, and margin is expressed as a percent. Margin can be negative for companies investing heavily. Both are included as plain percentages, not decimals.

The Formula

The Rule of 40 score is simply:

Where growth rate is:

And profit margin is:

Worked Example

Consider a SaaS company that grew ARR from $10 million last year to $14 million this year. YoY growth is (14 − 10) / 10 = 40%. The company’s EBITDA last year was −$1.4 million on $14 million revenue, so EBITDA margin is −10%.

The Rule of 40 score is 40% + (−10%) = 30%. That is below the heuristic target. Investors might ask whether growth could be higher given the loss, or whether costs could be tightened to improve margin without killing growth.

Now imagine the same company a year later: ARR grows from $14 million to $19.6 million (40% again), but EBITDA margin improves to +5% due to scale. The score becomes 45%, crossing the Rule of 40 line. The business is still growing quickly, but now it is also showing a path to profitability.

Interpreting Scores by Stage

The “40%” bar is most useful for mid‑scale SaaS. Earlier or later stages may interpret it differently:

Which Margin Should You Use?

Different companies use different profitability margins in the Rule of 40, and the choice affects the score. EBITDA margin is common in venture reporting because it shows operating efficiency before non‑cash items and interest. Free cash flow (FCF) margin is stricter because it includes working‑capital swings and capitalized software or infrastructure. Operating margin sits between them. The key is not which margin you pick, but that you pick one consistently over time and communicate it clearly. If your company capitalizes a lot of R&D or has lumpy collections, FCF margin may look weaker than EBITDA even when the business is healthy.

Scenario Comparison

The same score can represent very different strategies. Consider three simplified companies:

Companies B and C clear the bar in very different ways. B is still competing for growth and market share, while C is prioritizing cash generation. The rule does not tell you which approach is better—only that each is internally coherent.

How to Improve a Low Rule of 40 Score

Because the score is a sum, you can improve it in two ways:

• Increase growth. Improve conversion, add distribution channels, reduce churn, or expand pricing.
• Improve margin. Reduce CAC, tighten operating costs, improve gross margin through infrastructure efficiency or support tooling.

In practice, most companies move the score by sequencing priorities. A common pattern is to push for high growth early, then tighten burn once retention and unit economics are proven. If runway is short, margin improvements may be urgent even if they slow growth. If runway is long and the market is competitive, accelerating growth may be the better bet.

The best path depends on your market. In winner‑take‑most markets, prioritizing growth can be rational even if it hurts margin. In mature markets, improving margin may create more durable value.

Limitations and Assumptions

The Rule of 40 compresses a complex business into one number. It assumes:

• Growth and margin are measured over the same period and in comparable accounting.
• Your chosen margin metric (EBITDA, operating, or FCF) reflects real cash efficiency.
• Growth is sustainable rather than driven by one‑off deals or temporary pricing spikes.

The rule also ignores capital efficiency and customer economics. Two companies with identical scores may have wildly different CAC payback, net retention, or gross margins. For that reason, many boards review the Rule of 40 alongside LTV:CAC, NRR, and cash runway to ensure the score is not masking structural issues.

Two companies with the same score can be very different. A 45% score from 60% growth and −15% margin suggests a high‑burn land‑grab. A 45% score from 10% growth and 35% margin suggests a mature cash cow. Use the Rule of 40 as a conversation starter, not as the only decision tool.