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.

Tips

  • 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.

Frequently Asked Questions

It is an investor rule of thumb stating that a SaaS company is considered healthy if its revenue growth rate (%) plus profit margin (%) adds up to 40% or more. Its strength is condensing the trade-off between growth and profitability — invisible in either metric alone — into a single number.

The benchmark was popularized by partners at the venture capital firm Bessemer Venture Partners around 2015 and has since become widely used across the SaaS industry. It is not a strict theoretical value but a rule of thumb grounded in the collective experience of many investors.

Either works. EBITDA margin reflects accounting profitability, while FCF margin reflects actual cash generation, so different investors may prefer one over the other. If you are tracking the same company over time, stick to one metric for consistency.

Use this tool to see whether growth rate or profit margin has more room to improve. If growth is the weaker lever, focus on new customer acquisition or upsells; if profitability is the weaker lever, consider reviewing your cost structure or raising prices.

This varies with market conditions, but some equity analyst reports estimate that roughly 30–40% of public SaaS companies meet the benchmark. In periods of rising interest rates, investors tend to weight profitability more heavily, shifting this share over time.
ツールくん

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.

More tools in this category