Rule of 40 Calculator
Reviewed by Hamza Gujjar, Algorithm Architect & Software Developer
Last updated: July 27, 2026Balancing growth against profitability
The Rule of 40 is a widely used software and SaaS industry heuristic holding that a healthy company's revenue growth rate and profit margin, added together, should total at least 40% - allowing for very different but equally valid business strategies.
Worked example
For a company growing revenue at 25% annually with a 20% profit margin:
Combined Score = 25 + 20 = 45.0% (Passes the Rule of 40)
The Rule of 40 explicitly allows two very different profiles to both look healthy: a fast-growing company burning cash (say, 50% growth, -10% margin = 40) and a slower-growing but highly profitable one (10% growth, 30% margin = 40) - it is a flexibility feature, not a flaw, of this particular benchmark.
This metric is most commonly applied to subscription and SaaS businesses, where growth and profitability trade-offs are especially pronounced during different funding and scaling stages.