What Is Rule of 40?

A benchmark stating that a SaaS company's growth rate plus profit margin should exceed 40%.

The Rule of 40 is a widely-used SaaS benchmark that states a healthy company's combined revenue growth rate and profit margin should equal or exceed 40%. It helps balance the trade-off between growth and profitability.

For example, a company growing at 60% YoY with a -20% profit margin scores 40 and passes the rule. Similarly, a company growing at 20% with 20% profit margins also passes.

The Rule of 40 is particularly useful for evaluating companies at different stages — high-growth startups can afford to be unprofitable if growth is strong enough, while mature companies should be profitable even with slower growth.