Rule of 40
Also: Rule of Forty
A health check for software businesses: revenue growth rate plus profit margin should add up to at least 40 percent.
Why it matters
The Rule of 40 balances growth against profitability in a single test, recognising that a business can be healthy by growing fast, by being profitable, or by a mix. It is widely used to judge whether a SaaS company is managing that trade-off well. Falling below 40 suggests the balance is off.
How it is calculated
Rule of 40 = revenue growth rate (percent) + profit margin (percent); target is 40 or above
What good looks like
Hitting 40 or more is the bar: a company growing 30 percent with a 10 percent margin passes, as does one growing 10 percent at 30 percent margin. Which mix is right depends on stage, early companies lean on growth, mature ones on margin.
Related terms
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