SaaS "Rule of 40" Checker
Enter your revenue growth rate and profit margin (EBITDA margin or FCF margin) to instantly check whether your SaaS company meets the "Rule of 40," the investor rule of thumb for company health. See the gap to the target and which lever — growth or profit — has more room to improve.
Example combinations that satisfy the Rule of 40
| Type | Growth rate | Profit margin | Total |
|---|---|---|---|
| High-growth, invest-ahead type | 60% | −20% | 40 |
| Moderately high-growth type | 45% | −5% | 40 |
| Balanced type | 20% | 20% | 40 |
| Low-growth, high-profitability type | 10% | 30% | 40 |
| Mature, stable type | 5% | 35% | 40 |
Note: each row totals exactly 40. Whether growth or profitability should be prioritized depends on your business stage and funding strategy.
What is the Rule of 40?
The Rule of 40 is a rule of thumb for evaluating a SaaS company's "growth" and "profitability" together as a single number. You simply add the revenue growth rate (%) to the profit margin (%): if the total is 40 or higher, the company is considered healthy; if it falls short of 40, there is room for improvement. Looking at revenue or profit alone cannot tell you whether a company is investing aggressively to prioritize growth or running a conservative, profitability-focused operation. By bringing both perspectives together, the Rule of 40 makes visible a balance that no single metric can show on its own.
This tool lets you enter your growth rate and profit margin (either EBITDA margin or FCF margin) to instantly calculate the total and see whether you meet the benchmark. It also shows the gap to or surplus over the target of 40, diagnoses which lever — growth or profitability — has more room to improve, and plots a scatter chart so you can visualize the relationship between the two at a glance. It is designed for use cases like swapping in quarterly figures for board materials, or quickly screening the health of a SaaS company you are evaluating as an investment.
How to use the Rule of 40 checker
- Enter your revenue growth rate Enter either your year-over-year or quarter-over-quarter growth rate as a percentage. Negative values are allowed if revenue is declining.
- Enter your profit margin Enter either EBITDA margin or FCF margin as a percentage. Enter a negative value if the company is currently unprofitable.
- Check the result If the total is 40 or higher, you will see "Healthy"; if it falls short, you will see "Needs improvement," along with how many points you are above or below the target.
- Check which lever has more room to improve The tool automatically diagnoses whether growth or profitability has more upside, giving you a clear direction for your next initiative.
- Check your position on the scatter chart Your current position relative to the boundary line is plotted on the chart, letting you experiment with different values to see intuitively which lever would push you across the line.
Tips for getting more out of it
- You can use either EBITDA margin or free cash flow (FCF) margin for profitability — just stay consistent with the same metric when comparing against peers or your own past data.
- A single month or quarter can be skewed by seasonality, so using a trailing twelve months (TTM) average tends to give a more stable read on your Rule of 40 score.
- Even with negative growth (a shrinking business), a very high profit margin can push the total above 40 — this makes the rule flexible enough to apply to mature companies too.
- Early-stage SaaS companies commonly run negative profit margins and cover the gap with high growth to hit 40. There is no need to rush toward profitability if growth is strong.
- Try changing the numbers and watching the point move on the chart — it makes it intuitive to see whether pushing growth or profitability would get you across the boundary line.
Use cases
Health check for management meetings and board decks
A SaaS founder or CFO can check quarterly results against the Rule of 40 and present it as a single metric in board or shareholder materials.
Screening by VCs and investors
Well suited to a first-pass screening of whether a prospective investment or existing portfolio company has a healthy balance of growth and profitability, based on its disclosed figures.
Tracking quarter-over-quarter trends
Re-entering figures from past quarters in sequence lets you track whether your total score is trending up or down over time.
Strategy discussions by business stage
A useful prompt for deciding which lever to bet on right now — prioritizing growth in an early stage versus prioritizing profitability in a mature stage.
Benchmarking against public SaaS companies
Plug in the disclosed figures of public competitors or peers to see whether your own position sits above or below the industry average.
Glossary
- Rule of 40
- An investor rule of thumb stating that a SaaS company is considered healthy — with a good balance of growth and profitability — when its revenue growth rate (%) plus profit margin (%) adds up to 40% or more.
- EBITDA margin
- The ratio of earnings before interest, taxes, depreciation and amortization (EBITDA) to revenue. Used as a measure of accounting-based profitability.
- FCF (free cash flow) margin
- The ratio of free cash flow — operating cash flow minus capital expenditures — to revenue. It reflects the company's actual ability to generate cash on hand.
- TTM (trailing twelve months)
- A figure aggregated over the most recent twelve months. Because it smooths out seasonal fluctuations, it is often used for a more stable evaluation than a single quarter's figure.
- Weaker lever
- The result of this tool's diagnosis of whether growth rate or profit margin has more room to improve toward the target. It refers to whichever value is lower, or lagging behind the industry average.
- Churn rate
- The proportion of customers who cancel their contract within a given period. A lower churn rate creates a more stable foundation for revenue growth, making it easier to hit the Rule of 40.
- LTV (customer lifetime value)
- The total profit a single customer generates over the life of their contract. Often used alongside the Rule of 40 as a supplementary measure of business sustainability.
- CAC (customer acquisition cost)
- The total sales and marketing spend required to acquire a single new customer. Referenced alongside the Rule of 40 as a measure of how cost-efficiently growth is being achieved.
Frequently Asked Questions
Side Note — Turning "growth vs. profit" into a single number
The Rule of 40 is generally credited to partners at the venture capital firm Bessemer Venture Partners, who popularized it in blog posts around 2015. It was originally proposed as a rule of thumb to help private SaaS startups navigate the recurring management question of whether to prioritize growth or profitability. Its appeal lies in condensing a trade-off that neither annual revenue nor profit margin alone can capture into a single, easy-to-communicate number — a simplicity that spread quickly among both investors and founders.
What makes the rule interesting is that both a high-growth, low-profitability company and a low-growth, high-profitability company can satisfy it equally well. An early-stage SaaS company might invest heavily in marketing and hiring, running a negative profit margin while chasing 60% growth. A more mature company facing a saturated market for new customers, by contrast, might accept 5–10% growth while securing a profit margin above 30%. Which strategy is "correct" depends heavily on the funding environment and competitive landscape.
As global interest rates rose through the 2020s, investors reportedly began weighting profitability more heavily when applying the Rule of 40, favoring companies with stronger margins over pure growth stories. Still, the Rule of 40 remains a simplified heuristic, and it is generally recommended to combine it with other metrics — such as customer lifetime value (LTV) and customer acquisition cost (CAC) — for a fuller picture.