Definition
Rule of 40 is a SaaS heuristic: growth rate (%) + profit margin (%) should be ~40%+. It balances growth and profitability.
Formula
Rule of 40 score = revenue growth (%) + profit margin (%)
Example
If revenue growth is 35% and profit margin is 10%, the Rule of 40 score is 45% (often considered strong).
How to use it
- Use it as a stage-aware heuristic, not a universal law.
- Be explicit about the margin type (EBITDA vs operating vs FCF) and the growth definition.
Common mistakes
- Mixing margin types (EBITDA vs FCF) without clarity.
- Using the score as a target without considering stage and motion.
Why this matters
This term matters because small changes compound in SaaS metrics. Use consistent definitions by cohort and segment so you can diagnose retention, payback, and growth quality.
Practical checklist
- Write a 1-line definition for "Rule of 40" that your team will use consistently.
- Keep the time window consistent (weekly/monthly/quarterly) when comparing trends.
- Segment results (channel/plan/cohort) before drawing big conclusions from blended averages.
- Use a calculator that references this term (e.g., Rule of 40 Calculator) to sanity-check assumptions.
- Read the related guide (e.g., Rule of 40: definition, formula, and how to interpret it) for context and common pitfalls.
Where to use this on MetricKit
Calculators
- Rule of 40 Calculator: Calculate the Rule of 40 score: growth rate (%) + profit margin (%).
- Burn Multiple Calculator: Calculate burn multiple: net burn / net new ARR (a growth efficiency metric).
Guides
- Rule of 40: definition, formula, and how to interpret it: Rule of 40 explained: growth rate + profit margin. Learn which margin to use, how to compute it, and common pitfalls.
- Unit economics hub: CAC, LTV, payback, and runway (a practical stack): A practical hub for unit economics: CAC, fully-loaded CAC, LTV, payback, margin impacts, burn multiple, and runway planning.