Tools > Rule of 40 Calculator
Rule of 40 Calculator
Enter your revenue growth rate and profit margin to instantly calculate your Rule of 40 score - and see what it means for your SaaS.
Year-over-year ARR or MRR growth rate.
EBITDA margin (negative if pre-profitability).
What is the Rule of 40?
The Rule of 40 is a widely used benchmark for evaluating the health of a SaaS business. It states that a healthy SaaS company's revenue growth rate and profit margin should add up to 40% or more.
Popularised by venture capitalist Brad Feld, the rule gives investors and founders a single number that balances two things that are often in tension: growing fast and making money. A company growing at 60% that loses 10% does not need to worry about profitability yet. A company growing at 15% that is not profitable has a problem.
Rule of 40 Score = Revenue Growth Rate (%) + Profit Margin (%)
For the growth rate, use your year-over-year ARR or MRR growth. For profit margin, EBITDA margin is standard for private SaaS companies - Free Cash Flow (FCF) margin is preferred by public company analysts because it is harder to manipulate.
12%
Median Rule of 40 score across tracked SaaS companies in Q1 2025.
Most companies fall well below the 40% benchmark - which makes clearing it a genuine competitive signal.
How to interpret your score
The 40% line is the benchmark, but context matters. Here is what different score ranges mean in practice.
| Score | Rating | What it means |
|---|---|---|
| Below 20% | Struggling | Neither growing fast enough nor close to profitable. Investor appetite will be low and funding will come at a high cost of capital. |
| 20% - 39% | Approaching | Getting closer. Common for early-stage SaaS prioritising growth. A clear path to 40%+ is what investors want to see. |
| 40% - 59% | Healthy | Passes the Rule of 40. Public SaaS companies scoring above 40% command a median EV/Revenue multiple of 12.4x. |
| 60%+ | Exceptional | Top-decile SaaS performance. Top public companies like Snowflake and Datadog have historically posted scores of 60-80+. |
One important nuance: the rule weights growth and profitability equally, but early-stage companies are expected to sacrifice margin for growth. A score of 30% driven by 60% growth and -30% margin tells a very different story to a score of 30% driven by 5% growth and 25% margin.
How to improve your Rule of 40 score
There are only two levers - growth rate and margin. Here is where most SaaS founders focus:
- Reduce churn before adding acquisition spend
Every churned customer kills growth rate without reducing costs. Improving net revenue retention is the highest-leverage move for most early-stage SaaS - it grows the numerator without touching the denominator.
- Move upmarket to improve both levers at once
Larger contracts typically have higher ACVs, lower churn rates, and better gross margins. Moving from SMB to mid-market often improves growth rate and margin simultaneously.
- Build expansion revenue into the product
Seat-based pricing, usage-based tiers, and add-on modules generate revenue from existing customers. Net Revenue Retention above 110% can keep your growth rate high even when new logo acquisition slows.
- Audit your COGS and hosting costs
Gross margin is the foundation of EBITDA margin. If your hosting and infrastructure costs are consuming more than 20-25% of revenue, that is where the margin work starts - not in headcount.
- Build the right product features - and cut the rest
Engineering spend that builds features nobody uses destroys margin without improving growth. Ruthless product prioritisation is often the fastest path to a better Rule of 40 score.
Frequently asked questions
Why VeryCreatives?
Building a SaaS product?
These numbers are only useful if you're building the right product.
We help non-tech SaaS founders go from idea to live product - strategy, design, and development under one roof.