Unit economics
Check whether your growth-plus-profit clears the Rule of 40.
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What is the Rule of 40 for SaaS?
The Rule of 40 says a SaaS company's revenue growth rate plus its profit margin should be at least 40%. Growing 30% at a 10% EBITDA margin scores 40 and passes. Few companies clear it: the median B2B SaaS score was 25% in 2025 (Benchmarkit), and only 15% of large public SaaS companies cleared 40 in Q2 2026 (Aventis Advisors).
At 47% you clear the Rule of 40, your blend of growth and profitability signals a healthy, fundable business. Investors read this as efficient scaling.
The Rule of 40 says growth and profit are tradeable: burn is acceptable if you’re growing fast enough to offset it. It matters most from Series B onward.
About this calculator
The Rule of 40 exists because growth and profitability trade off against each other in SaaS, and investors want one number that says whether that trade is being made well. This sandbox lets you plug in your year-over-year growth rate and profit margin, then shows the combined score against the 40% bar, plus exactly how far over or under you land.
How to use it
- Enter your year-over-year revenue growth rate.
- Enter your profit margin, EBITDA or free cash flow margin, whichever your board tracks, and note it can be negative if you're burning cash.
- Read the combined Rule of 40 score, calculated simply as growth plus margin.
- Check the verdict: a pass at 40%+, or the exact percentage-point gap you're short if you're below it.
Methodology
The score is nothing more than growth rate plus profit margin, added directly, no weighting, no adjustment. A company growing 35% with a 12% margin scores 47 and clears the bar; a company growing 10% with a -5% margin scores 5 and falls well short.
Because the two inputs are simply summed, they're treated as fully interchangeable in this model: a point of margin is worth exactly the same as a point of growth. In practice investors sometimes weight growth more heavily at earlier stages, but the classic Rule of 40 formulation, and this tool, treats them as equal and additive.
The tool grades results into three tones, a pass at 40%+, a caution zone from 30-39%, and a fail below 30%, since a small miss on the Rule of 40 is a very different situation from being far off the pace.
This calculator does not model which lever is cheaper to pull for your specific business, that depends on your cost structure and growth stage. It just tells you the size of the gap so you can decide whether to chase growth or margin to close it.
The Rule of 40 formula
Rule of 40 score = YoY revenue growth % + Profit margin % Gap to threshold = 40 − Score (shown when the score is below 40) Margin over threshold = Score − 40 (shown when it passes)
- YoY revenue growth %
- Revenue (or ARR) this year versus the same period last year, in percent.
- Profit margin %
- EBITDA margin or free cash flow margin as a percent of revenue. Negative when the company burns cash.
- Score
- The sum of the two. 40 or more passes; this tool shows 30 to 39 as a caution zone and below 30 as a fail.
Use the same period for both inputs, normally the last twelve months. SaaS Capital calculates the score with year-over-year growth and EBITDA margin. Free cash flow margin is stricter because it includes capital spending and timing of collections. Pick one and keep it.
Worked example: two ways to score 40
Company A is a $12M ARR SaaS business growing 35% with a 12% EBITDA margin. Company B is a $4M ARR business growing 25% while burning cash at a −10% margin.
- Company A score = 35 + 12 = 47. That passes, 7 points over the threshold.
- Company B score = 25 + (−10) = 15. That fails, 25 points short of 40.
- Company B option 1, growth only: it needs 50% growth at −10% margin (50 − 10 = 40).
- Company B option 2, margin only: it needs a +15% margin at 25% growth (25 + 15 = 40), a 25-point swing in margin.
- Company B option 3, a mix: 35% growth at a +5% margin also scores 40.
Company A is well above both medians in the tables below. Company B sits below the 25% median for B2B SaaS, which is common for a company at that scale still investing ahead of revenue. The tool treats growth and margin points as equal, so the useful question for Company B is which 25 points are cheapest to find. Spend efficiency is usually where to look first: the SaaS magic number calculator shows how much new ARR each dollar of sales and marketing buys.
B2B SaaS Rule of 40 benchmarks (full-year 2025)
| Measure | Value |
|---|---|
| Median Rule of 40 score, 2025 | 25% |
| Median Rule of 40 score, 2024 | 15% |
| Top quartile score, 2025 | 43% |
| Median revenue growth, 2025 | 20% |
Public SaaS Rule of 40 (Q2 2026)
| Measure | Value |
|---|---|
| Median Rule of 40 score | 26% |
| Median revenue growth | 11.8% |
| Median profit margin | 14.6% |
| Companies clearing 40 | 7 of 46 (15%) |
What is a good Rule of 40 score?
40 is the bar investors quote, but it is a high one. The data gives a more useful scale:
- Above 40: top quartile. Benchmarkit put the top quartile of B2B SaaS at 43% in 2025, and only 15% of the large public companies Aventis tracks cleared 40 in Q2 2026.
- 25 to 40: around or above the median for both private B2B SaaS (25%) and public SaaS (26%).
- Below 25: below the median. Normal for an early company investing ahead of revenue, a concern at scale.
It also affects price. Aventis Advisors says a 10-point increase in the score corresponds to about 1.02x on EV/Revenue in its data. To see what that means in money, take your ARR to the ARR and SaaS valuation calculator.
The mix matters as well as the total. SaaS Capital found that growth rates remain well above EBITDA margins for the median private company at every revenue scale it studied, and that slower growth was the main reason scores fell between 2023 and 2025.
Rule of 40 in India vs the US
The score is a percentage, so it works the same in rupees, but check what goes into EBITDA. Indian companies reporting under Ind AS should treat ESOP costs and one-time items the same way every period, or the margin will jump around. Indian SaaS companies selling to US customers are compared with US benchmarks, so report growth in the currency investors use, usually USD, to keep exchange-rate moves out of the growth figure. When runway is short, the guide to what marketing to cut covers how to protect growth while improving margin.
Most published Rule of 40 data comes from US-listed companies, including the Aventis sample above, so US companies compare against it directly. Some public-market analysts use free cash flow margin, while SaaS Capital's private analysis uses EBITDA, so check the basis before comparing. Stock-based compensation is a frequent source of disagreement: adjusted EBITDA usually adds it back, which flatters the score.
Common Rule of 40 mistakes
- Mixing periods, such as quarterly growth annualised against a trailing twelve-month margin.
- Switching between EBITDA, free cash flow and operating margin between board meetings.
- Using bookings growth instead of revenue or ARR growth, which overstates the score in a strong sales quarter.
- Hitting 40 by cutting sales and marketing so hard that next year's growth collapses.
- Judging a sub-$5M ARR company by a threshold mainly used for later-stage and public companies.
- Adding back every cost to adjusted EBITDA until the margin no longer reflects cash.
Sources
- Rule of 40: what's a good score for SaaS in 2026?, Aleph (Benchmarkit 2026 SaaS & AI Performance Benchmarks). Accessed 2026-10-17.
- SaaS Valuation Multiples: 2015-2026, Aventis Advisors. Accessed 2026-10-17.
- Clouded Judgement 1.30.26 - Software is Dead...Again!, Clouded Judgement (Jamin Ball). Accessed 2026-10-17.
- Growth, Profitability, and the "Rule of 40" for Private SaaS Companies, SaaS Capital. Accessed 2026-10-17.
FAQ
Less so. It's primarily used from Series B onward, or for public SaaS comps, when a company has enough scale that the growth/profitability trade-off is a real strategic choice. A pre-seed company burning cash to find product-market fit isn't meaningfully judged by this metric.
Either is standard practice; the important thing is consistency. Pick the margin your board or investors already track and use it every time you run this, mixing EBITDA one quarter and FCF the next will make trend lines misleading.
Mathematically the formula allows it if margin is high enough, but negative growth combined with any margin level is a serious warning sign in SaaS. A high Rule of 40 score built on shrinking revenue and cost-cutting reads very differently than one built on healthy growth.
That's the classic formulation and what this calculator uses, but it's a simplification. Some investors apply more weight to growth at high-growth-rate companies. Use this as a quick directional check, not the final word on how your specific investors will underwrite the trade-off.
Add your year-over-year revenue growth percentage to your profit margin percentage. A company growing 22% with an 18% EBITDA margin scores 40. If you burn cash, the margin is negative: 50% growth at −15% margin scores 35.
A minority. Aventis Advisors found 7 of 46 large public SaaS companies (15%) cleared 40 in Q2 2026, and the Benchmarkit 2025 data puts the top quartile of B2B SaaS at 43%, which means roughly three in four companies are below that level.
Yes, though growth usually counts for more. Aventis Advisors reports that a 10-point increase in the score corresponds to about 1.02x on EV/Revenue in its data. Growth on its own moves multiples more: in January 2026 [Clouded Judgement](https://cloudedjudgement.substack.com/p/clouded-judgement-13026-software) put high-growth public cloud companies at a 12.4x median forward revenue multiple against 3.1x for low-growth ones.
The formula still works: the negative margin reduces the score. A company growing 60% with a −20% margin scores 40 and passes. That is the trade the rule is meant to allow, heavy burn is acceptable only when growth is high enough to cover it.
Yes, by investors who compare Indian SaaS companies with global peers, but mainly from growth stage onward. Early-stage companies are judged more on growth, retention and burn multiple. Use the [burn rate optimisation forecaster](/calculators/burn-rate-optimization-forecaster) to see how margin changes extend runway.
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