Businesssaas

Rule of 40 Calculator

Growth plus margin. The heuristic is that a software business should clear 40 on the sum of the two, trading one against the other freely.

Also called: saas rule of 40, growth plus margin score.

Rule of 40 score

37: Below 40. Either growth or margin has to improve.

What that means

Below 40. Either growth or margin has to improve.

How this is calculated

Method and background

How this is calculated

Add the growth rate to the profit margin. The idea is that growth and profitability are substitutes at the margin. 60% growth at −20% margin and 10% growth at 30% margin both score 40. It is a rule of thumb, not an accounting identity, and it says nothing about whether the growth is durable.

score = growth_rate + profit_margin

g: Year-on-year revenue growth, in percent
m: Profit margin, in percent

Worked examples

Each of these is asserted on every build. If a change to the engine ever moved one of these answers, the build would fail before the page could print it.

45% growth at -8% margin

Revenue growth rate (year on year): 45%
Profit margin (EBITDA or FCF): -8%

Rule of 40 score37

arithmetic identity: just below the bar

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exactly 40

Revenue growth rate (year on year): 10%
Profit margin (EBITDA or FCF): 30%

Rule of 40 score40

boundary

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shrinking and lossmaking

Revenue growth rate (year on year): -10%
Profit margin (EBITDA or FCF): -30%

Rule of 40 score-40

degenerate case: negatives are representable

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