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.
Measured as
Rule of 40 score = revenue growth (%) + profit margin (%)
Misused when
- Mixing margin types (EBITDA vs FCF) without clarity.
- Using the score as a target without considering stage and motion.
Operator takeaway
- 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.
- Keep Rule of 40 consistent by cohort, segment, and period before you use it as a decision signal in planning or reporting.
- Interpret the metric alongside retention, margin, or payback so one ratio does not hide the real operating trade-off.
Next decision
- Quantify the impact with Rule of 40 Calculator if you need to turn the definition into an operating assumption.
- Read Rule of 40: definition, formula, and how to interpret it if the decision depends on interpretation, policy, or trade-offs beyond the raw formula.
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.