Rule of 40
A SaaS benchmark stating that a company's revenue growth rate plus profit margin should sum to 40% or more.
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FAQs
Which profitability metric should I use in Rule of 40?
There is no single standard. EBITDA margin is most common in venture and PE discussions. Free cash flow margin is preferred for public company analysis. Gross profit margin is sometimes used for very early-stage companies before fully-loaded operating expenses are meaningful. Be explicit about which metric you're using.
What do top SaaS companies score on the Rule of 40?
As of 2023–2024, top-performing public SaaS companies like Veeva Systems, Tyler Technologies, and Paycom consistently score above 50. Hyperscalers like Snowflake and Cloudflare have scored above 40 even while prioritizing growth. The median public SaaS company scores in the 20–35 range.
Does the Rule of 40 apply to early-stage startups?
It's less meaningful below $10M ARR, where growth rates of 200%+ combined with −100% or more operating losses still produce very high scores. The rule becomes most actionable when a company is deciding how hard to push growth vs. improving margins in the $20M–$100M ARR range.
Related Terms
Annual Recurring Revenue
The annualized value of all active recurring subscription contracts, the primary revenue metric for SaaS businesses.
Burn Rate
The rate at which a company spends its cash reserves each month, critical for tracking how long funding will last.
SaaS Quick Ratio
A metric measuring SaaS revenue growth quality by comparing new and expansion MRR gained to churned and contracted MRR lost.
Magic Number
A SaaS sales efficiency metric measuring how much new ARR is generated for every dollar spent on sales and marketing.