Rule of 40 SaaS Calculator

Check if your SaaS business meets the Rule of 40 benchmark

Revenue Growth Rate (YoY)35%

-20%0%50%100%200%

Profit Margin (EBITDA)10%

-50%-25%0%25%50%

Rule of 40 Score

Excellent

Target: 40+

Revenue Growth35%

Profit Margin10%

Congratulations! Your company meets or exceeds the Rule of 40 benchmark. This indicates a healthy balance between growth and profitability.

Formula: Growth Rate + Profit Margin = 35% + 10% = 45

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Industry Benchmark

The Rule of 40 states that a SaaS company's growth rate plus profit margin should be at least 40%.

Investor Metric

Top VCs and PE firms use the Rule of 40 to evaluate SaaS company health and investment potential.

Instant Analysis

Get immediate feedback on whether your business meets, exceeds, or falls short of the benchmark.

Growth vs Profit

Visualize the trade-off between growth and profitability that defines SaaS economics.

About This Calculator

The Rule of 40 is a widely used benchmark that states a healthy SaaS company's combined revenue growth rate and profit margin should equal or exceed 40%. It balances the tension between growth and profitability -- a company growing at 60% can afford a -20% profit margin, while a company growing at 10% needs at least 30% margins to pass. This calculator instantly evaluates your business against this benchmark and shows how far above or below the threshold you stand.

How to Use

Enter your year-over-year revenue growth rate as a percentage (e.g., 35 for 35% growth).

Enter your profit margin as a percentage -- this can be EBITDA margin, operating margin, or free cash flow margin depending on your preference.

Review whether your combined score meets the Rule of 40 threshold, along with analysis of how your growth-profitability balance compares to industry benchmarks.

Frequently Asked Questions

Where does the Rule of 40 come from?

The Rule of 40 was popularized by venture capitalist Brad Feld and has since become a standard benchmark among SaaS investors and operators. It emerged from the observation that the most successful SaaS companies maintain a balance where growth rate plus profitability consistently exceeds 40%, regardless of which side contributes more.

Should I use EBITDA margin or free cash flow margin?

There is no universal standard -- different investors and analysts use different profitability metrics. EBITDA margin is the most common choice for the Rule of 40 because it strips out non-cash expenses and financing decisions. Free cash flow margin is increasingly preferred because it reflects actual cash generation. The key is to be consistent in how you measure it over time.

What if my Rule of 40 score is below 40?

A score below 40 does not mean your business is failing -- it means there is room to improve. If growth is slowing, focus on expansion revenue and reducing churn. If margins are thin, look at optimizing infrastructure costs, improving pricing, or reducing customer acquisition costs. Many successful SaaS companies dip below 40 during heavy investment periods and recover as they scale.