Rule of 40
Also: Rule of Forty, 40% Rule, Règle des 40, Règle des 40 %, 40er-Regel, Rule-of-40 Score
A SaaS health check: revenue growth rate plus profit margin should reach or exceed 40%. It balances how fast you grow against how much you burn.
What It Is
The Rule of 40 is a benchmark for software and subscription businesses that adds your revenue growth rate to your profit margin. If the sum reaches 40% or more, the business is considered healthy; below that, it raises questions. A company growing 30% with a 10% margin scores 40 and passes. A company growing 15% with a 5% margin scores 20 and needs a plan. Growth and profitability are read together, not in isolation.
Why it matters
Investors and boards use the Rule of 40 to compare companies at very different stages on one line. A young company can score well by growing fast while losing money; a mature one scores well by growing slowly with strong margins. The rule stops leadership from over-optimising one number at the expense of the other, for example chasing growth while cash burn spirals, or protecting margin while competitors take the market. For a CFO it frames spending discipline. For a CMO it justifies acquisition budget when growth is genuinely funding future value. For a CEO it is a shorthand every stakeholder recognises.
How it works
Pick a consistent revenue growth figure (usually year-over-year ARR or revenue growth in percent) and a consistent margin figure (often free cash flow margin or an adjusted operating margin), then add them. Example: your ARR grew 25% and your free cash flow margin was 12%. Your score is 37, just under the bar, so the conversation turns to which lever moves cheapest. The two inputs must use the same period and the same definition every quarter, or the trend line lies to you. Treat it as a directional signal rather than a verdict: an early-stage company deliberately below 40 to capture a market can be making the right call, provided the path back above 40 is explicit and dated.