A free rule of 40 calculator SaaS founders rely on. Add your growth rate to your profit margin and see if you clear the 40% bar that investors use to judge whether your growth and profitability are in healthy balance.
This calculator runs entirely in your browser. Nothing you enter is sent anywhere or stored. It is a quick estimate, not financial advice.
The Rule of 40 is the benchmark investors use to judge whether a SaaS is balancing growth and profitability sensibly. The idea is simple: your growth rate plus your profit margin should add up to at least 40%. A SaaS growing 60% can afford to burn at a 20% loss. One growing 10% needs to be solidly profitable. This calculator adds the two and tells you where you stand.
The power of the rule is that it refuses to let you cheat on either axis. You cannot justify reckless burn with mediocre growth and you cannot hide stalled growth behind thin profitability. Public SaaS investors watch it closely and it increasingly shapes how private SaaS is valued too. Clearing 40 consistently is a strong signal of a durable business.
Use year-over-year revenue growth as a percentage. ARR growth is the usual basis for SaaS.
Use EBITDA or free cash flow margin as a percentage. A loss is a negative margin, which pulls your score down.
The two should sum to 40 or more. Below that, either growth or margin needs work, depending on your stage and strategy.
The Rule of 40 is a benchmark stating that a healthy SaaS company's revenue growth rate plus its profit margin should equal at least 40%. It balances the two ways a SaaS can create value: growing fast or being profitable. A company growing 50% with a negative 10% margin scores 40 and passes, as does one growing 15% with a 25% margin. It stops companies from justifying heavy losses with weak growth or hiding stalled growth behind thin profits.
Add your year-over-year revenue growth rate to your profit margin, both as percentages. If the sum is 40 or higher, you pass. Profit margin is usually measured as EBITDA margin or free cash flow margin and a loss counts as a negative number that reduces your score. The calculation is deliberately simple, which is part of why investors lean on it as a quick health check.
Anything at or above 40% is considered healthy and the best SaaS companies sustain scores well above it. The composition matters too: a score of 40 driven by 40% growth and breakeven margin tells a different story from 40 driven by 10% growth and 30% margin, even though both pass. Investors look at both the total and the balance, favouring companies that can shift between growth and profit as conditions change.
Often not yet and that is widely understood. Early-stage SaaS frequently runs below 40 because it is investing heavily in growth and burning cash to do it, which is appropriate when the opportunity is large. The Rule of 40 becomes a serious benchmark as a SaaS matures and approaches scale, particularly ahead of a raise or an exit. Investors will, however, want to see a credible path to clearing 40 over time.
It depends on your stage, your market and your funding. Early on, growth usually creates more value, so a SaaS might deliberately run a thin or negative margin to grow faster, accepting a lower score short term. As the market matures or capital tightens, shifting toward margin can make more sense. The strength of the Rule of 40 is that it lets you trade between the two, as long as the sum stays healthy.
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