Rule of 40

Q: What is a good Rule of 40 score?

A combined score of 40 or more is considered healthy. Between 30 and 40 is acceptable but worth improving, and below 30 suggests growth and profitability together aren't keeping pace. The benchmark is a guideline, not a hard pass-fail line.

Q: Can a company pass the Rule of 40 while losing money?

Yes. The rule trades growth against profit, so a fast-growing company can run a negative margin and still clear 40 if its growth is high enough. A company growing 60% can absorb a minus-20% margin and still score 40. The reverse also holds: a slow grower must be solidly profitable to pass.

Q: Which profit margin do you use in the Rule of 40?

There's no single mandated metric — EBITDA margin and free-cash-flow margin are the two most common choices. The important thing is to use the same definition consistently when comparing periods or companies, since the two can give noticeably different scores.

A quick health check for SaaS: add your growth rate to your profit margin, and the total should be at least 40. It balances the trade-off between growing fast and earning money.

In plain English

Every SaaS company sits somewhere on a spectrum between growing fast and making money. The Rule of 40 captures that trade-off in a single number: take your revenue growth rate and add your profit margin, both as percentages. If the two together reach 40 or more, you're considered healthy — you've struck a reasonable balance. A young company might hit it on pure growth while burning cash; a mature one hits it on profit while barely growing. Either is fine. What investors worry about is a company that's neither growing quickly nor turning a profit — and the rule flags that instantly.

The formula

Rule of 40 = Revenue growth rate % + Profit margin % → should be ≥ 40

The profit margin can be EBITDA or free-cash-flow margin — pick one and apply it consistently, because the two definitions can move the score by several points.

A worked example

Imagine a company growing revenue at 30% a year while running a 15% free-cash-flow margin.

Rule of 40 = 30% + 15% = 45 → passes (≥ 40)

It clears the bar comfortably. Now picture a company growing at 60% but burning cash at a minus-20% margin: 60 + (−20) = 40 — it still passes, because the breakneck growth pays for the losses. Drop its growth to 35% with the same margin and the score falls to 15, well short.

What's a good Rule of 40 score?

The threshold is right there in the name — here's how the score is usually read:

Combined score	Verdict	What it signals
≥ 40	Healthy	Well-balanced growth and profit
30–40	Acceptable	Close, but worth tightening
< 30	Warning sign	Neither growing nor earning enough

High-growth companies can run deeply negative margins and still pass, as long as growth is high enough to cover the gap. The rule rewards efficiency, not profitability for its own sake — which is why it pairs naturally with the burn multiple.

Frequently asked questions

What is a good Rule of 40 score?

A combined score of 40 or more is considered healthy. Between 30 and 40 is acceptable but worth improving, and below 30 suggests growth and profitability together aren't keeping pace. The benchmark is a guideline, not a hard pass-fail line.

Can a company pass the Rule of 40 while losing money?

Yes. The rule trades growth against profit, so a fast-growing company can run a negative margin and still clear 40 if its growth is high enough. A company growing 60% can absorb a minus-20% margin and still score 40. The reverse also holds: a slow grower must be solidly profitable to pass.

Which profit margin do you use in the Rule of 40?

There's no single mandated metric — EBITDA margin and free-cash-flow margin are the two most common choices. The important thing is to use the same definition consistently when comparing periods or companies, since the two can give noticeably different scores.

MRR growth rate · Gross margin · Burn multiple · SaaS magic number

Learn more

The complete guide to value-based bidding · Value-based bidding without a data team