Growth — best-in-class is 40+. Below 20 usually means CAC > LTV, gross margin too low, or growth has stalled.
Rule of 40 score
50
Healthy
Growth contribution
60%
Margin contribution
-10%
Gross margin
75%
healthy SaaS
What to improve
Keep this mix — you're in the top quartile.
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About
The Rule of 40 says a healthy SaaS company's growth rate plus profit margin should exceed 40%. Public market investors use it as a quick screening test; private founders use it to balance growth and burn.
How it works
- 01Score = YoY revenue growth% + EBITDA margin%.
- 02≥ 60: top-tier (Snowflake, Datadog historically).
- 0340–60: healthy.
- 04< 40: needs better growth OR better margins.
Examples
Hypergrowth at a loss
60% growth, −10% margin = 50. Above the line — investors will tolerate the burn for the growth.
Mature SaaS
20% growth, 25% margin = 45. Boring? Maybe. But comfortably above 40, so the market rewards it.
FAQ
Growth = revenue growth or ARR growth?+
Either works — be consistent. Public companies use revenue; private SaaS often uses ARR.
Margin = EBITDA, FCF, or net income?+
Operating margin or FCF margin are most common. Avoid net income (taxes, one-offs distort the picture).
Does it apply to non-SaaS?+
It was invented for SaaS. Marketplaces and consumer can borrow the framework but should benchmark against their own peers.