Revenue Metrics

Rule of 40

A benchmark stating that a healthy SaaS company's revenue growth rate plus profit margin should sum to at least 40%.

The Rule of 40 combines growth and profitability into a single number, acknowledging that the optimal tradeoff between the two depends on where a company is in its lifecycle. A business growing 60% annually can afford to lose 20% of revenue and still pass. A business growing 20% annually needs to be 20% profitable to pass. The rule captures the idea that growth and profitability are both valid uses of capital, and only the combination matters — not either one in isolation. Companies scoring above 40 are generally considered healthy; above 60 is exceptional. The metric becomes more relevant as companies scale toward $50M+ ARR — early-stage companies prioritising growth almost always sacrifice profitability, and that is expected. The Rule of 40 is a tool for boards and investors evaluating mature businesses against a balanced growth-efficiency standard.