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Rule of 40

In the competitive world of SaaS, striking the right balance between growth and profitability is crucial for long-term success. One popular metric used to assess this balance is the Rule of 40. In this article, we'll dive into what the Rule of 40 is, why it's important, its benefits, and how to calculate it for your SaaS business.

What is the Rule of 40?

The Rule of 40 is a financial benchmark that helps SaaS companies evaluate their balance between growth and profitability. It states that the sum of a company's annual revenue growth rate (as a percentage) and its profit margin (as a percentage) should be equal to or greater than 40%. This rule helps companies strike a balance between investing in growth (e.g., customer acquisition and product development) and maintaining profitability (e.g., operating efficiency and cost control).

Why is the Rule of 40 important?

The Rule of 40 is important because it provides a valuable guideline for SaaS companies to ensure they're growing sustainably while maintaining profitability. Focusing solely on growth without considering profitability can lead to cash flow issues and long-term instability. On the other hand, prioritizing profitability without sufficient growth can limit a company's ability to scale and compete in the market. The Rule of 40 offers a way to evaluate both aspects simultaneously, helping businesses make informed decisions about their growth and profitability strategies.

Benefits of the Rule of 40:

Some benefits of using the Rule of 40 include:

  1. Sustainable growth: The Rule of 40 helps SaaS companies grow in a sustainable manner by ensuring they balance growth with profitability.
  2. Financial stability: By adhering to the Rule of 40, companies can avoid cash flow problems and maintain financial stability in the long run.
  3. Attracting investors: Companies that follow the Rule of 40 are often considered attractive investment targets because they demonstrate a healthy balance between growth and profitability.
  4. Benchmarking: The Rule of 40 serves as a useful benchmark for SaaS companies to compare their performance against peers and industry standards.

How to calculate the Rule of 40:

To calculate the Rule of 40, follow these steps:

  1. Calculate the annual revenue growth rate: Determine the percentage increase in revenue over the past year.

Annual Revenue Growth Rate (%) = [(Current Year's Revenue - Previous Year's Revenue) / Previous Year's Revenue] x 100

  1. Calculate the profit margin: Determine the operating profit margin by dividing the operating income by the total revenue and multiplying by 100.

Profit Margin (%) = (Operating Income / Total Revenue) x 100

  1. Apply the Rule of 40: Add the annual revenue growth rate and the profit margin.

Rule of 40 Result = Annual Revenue Growth Rate (%) + Profit Margin (%)
If the result is equal to or greater than 40%, your company is adhering to the Rule of 40.


The Rule of 40 is a valuable financial benchmark for SaaS companies, helping them strike the right balance between growth and profitability. By following this rule, businesses can ensure they are growing sustainably while maintaining financial stability. Regularly evaluating your company's performance against the Rule of 40 can provide valuable insights for decision-making and long-term planning.