AdvancedMetric 23 of 35

Rule of 40

Growth rate + profit margin should sum to ≥ 40%.

A back-of-napkin test for whether a SaaS company has balanced growth and profitability. Below 40 = either growing too slow or burning too hot. Above 40 = sustainable.

Formula

Rule of 40 = Growth Rate (%) + Profit Margin (%)

Worked example

ARR growth 60%, EBITDA margin −10% → Rule of 40 = 50. Healthy.

Benchmark

Public SaaS

Elite

> 60

Sustainable

40–60

Subscale

< 30

Why it matters

Originally a public-market test, now used in private SaaS as a sanity check. Investors prefer 60% growth at −20% margin over 25% growth at +15% margin — both score 40, but the first is a venture-scale outcome and the second is a lifestyle business. Use Rule of 40 to direct capital allocation, not to score yourself.

Common mistakes

Using gross margin instead of EBITDA or FCF margin — wrong denominator, wrong signal.
Applying to companies with < $1M ARR (the metric is noisy at small scale).

Tracked in FlowMRR

Not tracked — needs your P&L margin; pair it with Dashboard → ARR growth rate.

See Rule of 40 in FlowMRR