Rule of 40 SaaS: The Ultimate Growth & Profitability Metric

If you're running a SaaS company, there's one metric that investors, board members, and acquirers care about more than almost anything else: the Rule of 40. This deceptively simple benchmark has become the gold standard for measuring whether your business has found the sweet spot between growth and profitability.

But here's the reality check: as of Q1 2025, the median Rule of 40 score across tracked SaaS companies is 12%, with a median growth rate of 10% and EBITDA margins of just 6%. Most companies aren't hitting the target. So what does it take to get there?

What Is the Rule of 40?

The Rule of 40 is straightforward: a healthy SaaS company's annual revenue growth rate and its profit margin should add up to 40% or more. The Rule of 40 gained prominence in the mid-2010s within the venture capital community and was popularized by investors like Brad Feld as a simple way to evaluate the health of their SaaS portfolio companies.

The beauty of this metric lies in its flexibility. You can hit 40% through different combinations:

• High-growth, low profitability: A company growing at 60% YoY with a -20% profit margin meets the rule (60% + (-20%) = 40%), common for earlier-stage companies in a high-growth phase, aggressively investing in sales, marketing, and product development to capture market share
• Balanced approach: A company with 20% YoY growth and a 20% profit margin meets the rule and may represent a more mature, stable company with a balanced approach
• Profitability-focused: A company with 5% YoY growth and a 35% profit margin also meets the rule, often characterizing a market leader in a mature market that is focused on maximizing cash flow rather than expansion

How to Calculate Your Rule of 40 Score

The calculation requires just two inputs: growth rate and profit margin. Here's how to nail it:

Step 1: Calculate Your Growth Rate

For a SaaS business, growth rate is measured by comparing YOY changes in Annual Recurring Revenue (ARR) or Monthly Recurring Revenue (MRR). You can also use Total Revenue. Most SaaS companies prefer ARR or MRR since recurring revenue is the lifeblood of the subscription model.

Here's a quick example: If a company generated $10 million in revenue in 2019 and $12 million in revenue in 2020, then its year-over-year revenue growth would equal 20% ($2 million divided by $10 million, then multiplied by 100%).

Step 2: Calculate Your Profit Margin

EBITDA is preferred as the standard measurement for profitability, as it strips out differences in interest expense, tax treatment, amortization, and depreciation, making EBITDA margin the best indicator for profitability. This puts all companies on a level playing field regardless of their capital structure.

Step 3: Add Them Together

Simply add your growth percentage to your profit margin percentage. If the result is 40% or higher, congratulations—you've hit the benchmark.

Real-World Performance: Who's Crushing It?

While the median score sits at just 12%, some companies are excelling. Only a handful of high performers, such as Doximity (55%), Klaviyo (25%), and MeridianLink (36%), are comfortably above the 40% threshold.

Even mature giants can maintain strong scores. Salesforce achieved a Rule of 40 score of 41.5% in 2024, representing a remarkable transformation from growth-at-all-costs mentality to disciplined profitability focus.

The payoff is real: Software companies that outperform the Rule of 40 have valuations double that of companies that fall "below the line," and they achieve returns as much as 15% higher than the S&P 500.

Connecting Rule of 40 to Unit Economics

The Rule of 40 doesn't exist in isolation. It's intimately connected to your unit economics—the fundamental metrics that determine whether each customer you acquire is actually profitable.

Your ARR and MRR growth rates feed directly into the Rule of 40 calculation, but they're driven by underlying factors like Customer Acquisition Cost (CAC), Lifetime Value (LTV), and retention rates. Top SaaS businesses achieve median net retention rates (NRR) of 120 percent or more—which means these businesses are able to deliver 20 percent growth every year without adding a single new customer.

This is where the magic happens: when your unit economics are solid—meaning your LTV:CAC ratio is healthy and your payback period is reasonable—you can fuel growth without burning through capital. That efficiency is what allows you to maintain strong EBITDA margins even while growing.

When Should You Care About Rule of 40?

The Rule of 40 provides the most value for mature SaaS companies with established business models. Early-stage startups often prioritize aggressive growth over immediate profitability, making this metric less applicable since the company is only focusing on half of the equation.

As companies approach $5 million in ARR, investors increasingly expect to see scores near 40%. For example, 60% growth paired with –20% EBITDA margins would meet the benchmark.

The Bottom Line

The Rule of 40 isn't just another vanity metric—it's a strategic compass that helps you navigate the constant tension between investing in growth and delivering profitability. Whether you're preparing for fundraising, planning an exit, or simply want to benchmark your performance, this metric gives you a clear, actionable snapshot of your company's health.

The question isn't whether you should track it. The question is: what are you going to do to improve your score?

For more on SaaS financial frameworks, check out Wikipedia's comprehensive overview or explore McKinsey's research on Rule of 40 success factors.