Business & SaaS
SaaS Rule of 40 Calculator
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How to use it
Using the saas rule of 40 calculator
- 01
Enter growth rate
Year-over-year revenue growth percentage from your latest full period.
- 02
Enter profit margin
EBITDA or operating margin; whichever your board reports, applied consistently.
- 03
Read the score
At or above 40 passes the benchmark; the verdict row spells out the balance you struck.
Good to know
The insight behind the sum
Before the rule of 40 became venture shorthand circa 2015, boards argued past each other: growth advocates defended losses, profitability advocates attacked them. The sum reframes the argument; spend on growth freely, provided the total score clears 40. It converts a philosophical fight into one comparable number.
What different profiles look like
- Hypergrowth: 80% growth − 40% margin = 40; passing while burning heavily.
- Cash machine: 5% growth + 38% margin = 43; passing while growing slowly.
- Trouble: 10% growth + 5% margin = 15; neither fast nor rich enough.
Public SaaS data shows scores clustering near the line, with top decile performers clearing 60; useful calibration for private-company ambitions.
How it's calculated
The math behind this calculator
Score = Revenue growth % + Profit margin % (pass ≥ 40)The rule of 40 captures a portfolio-level truth: growing fast usually costs money, and printing money usually slows growth. Adding the two percentages asks whether the combination is strong overall; a 60%-grower losing 15% on margin scores 45 and passes, while a flat-growth 50%-margin business also passes at 50. Either profile can be healthy; weakness on both fronts cannot.
Assumptions & limitations
- Growth is year-over-year revenue growth; margin is EBITDA or operating margin, consistently chosen.
- Designed for software/subscription businesses above rough-product-market fit.
- A screening heuristic, not a valuation model; context like burn multiple and retention completes the picture.
Worked example
Growing 35% a year with a 12% profit margin scores 47 on the rule of 40; comfortably passing the benchmark.
FAQ
Frequently asked questions
- Which margin should I use?
- EBITDA margin is the common choice; operating margin is stricter and increasingly preferred. Either works; just use the same basis as any benchmark you compare against.
- Does it apply outside SaaS?
- It was built for software economics with high gross margins. Services and hardware businesses fail it structurally, so don’t force the comparison.
- Can the score be negative?
- Yes; shrinking revenue plus negative margin sums below zero, which correctly reads as a turnaround situation rather than a growth story.
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