Rule of 40
This metric is defined in Core Metrics. Finance lists it here as a key outcome metric.
Rule of 40: A heuristic that balances growth and profitability. A healthy SaaS company's growth rate plus profit margin should equal 40% or more.
Formula
Rule of 40 = ARR Growth Rate (YoY %) + EBITDA Margin (%)Benchmarks
- Below 20: Struggling (Median public SaaS Q1 2025: 12-15%)
- 20-40: Developing (Median mid-2024: 34%)
- 40+: Healthy balance of growth and profitability
- 60+: Elite (top quartile: 45%+ growth component)
What It Tells You
Whether you're balancing growth and profitability appropriately. You can grow fast and lose money, or grow slow and be profitable, but the sum should hit 40.
Dual-Lens Note
The Rule of 40 is a composite metric. Its dual-lens behaviour is inherited from its inputs: - **Rule of 40-O** = ARR-O Growth Rate + Contribution Margin (GM-O) - **Rule of 40-M** = ARR-M Growth Rate + EBITDA Margin A company with 30% ARR growth and heavy implementation costs might report Rule of 40-M = 45 (healthy) while Rule of 40-O = 32 (below threshold). The gap shows whether the balance of growth and profitability holds once delivery costs are counted. No separate O/M inclusion rules are needed. Use the ARR and Gross Margin forms defined above.
Related Metrics
Connected in the GASP relationship graph.
Upstream: what drives this
- ARR component of Rule of 40 (Core)
Downstream: what this drives
- Rule of 40 measures Subscription (Entity)