SaaS & growth
Rule of 40
Formula reviewed by Tahir Asif, CMA
Revenue growth rate plus profit margin should add up to at least 40% for a healthy SaaS company.
The Rule of 40 checks whether a SaaS company is balancing growth against profitability sensibly: add the revenue growth rate and the profit margin (commonly EBITDA margin), and a combined score of 40% or higher is treated as a sign of a well-balanced business.
It treats growth and profit as interchangeable — a fast-growing, unprofitable company and a slow-growing, highly profitable one can score identically, which is exactly the trade-off the rule is designed to make visible rather than resolve.
Rule of 40 score
Revenue growth rate (%) + Profit margin (%)
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