The Rule of 40 says a healthy SaaS company's growth rate plus profit margin should total at least 40%. See where you stand.
Growth rate + profit margin should total at least 40%.
It is the shorthand investors use to judge whether a software business is balancing growth against profitability sensibly, and it has become one of the most cited benchmarks in SaaS. The Parix.ai Rule of 40 calculator scores both halves from figures you already report.
A company growing 60% while losing 15% scores 45 and passes. One growing 15% at 10% profit scores 25 and does not.
Because it refuses to let you optimise one number at the expense of the other.
Fast growth funded by unlimited losses is not a business. High margins with no growth is a business in decline. The rule forces the trade-off into a single figure that cannot be gamed by ignoring half the picture.
Growth rate — year-over-year revenue growth as a percentage.
Profit margin — usually EBITDA margin, sometimes free cash flow margin.
Add them. 40 or above passes.
Use the same margin definition consistently. Switching between EBITDA and free cash flow between quarters makes the score meaningless as a trend.
| Score | Interpretation |
|---|---|
| Above 60 | Exceptional, rare, and usually not sustained for long |
| 40–60 | Healthy. The target range |
| 20–40 | Under pressure. One of the two levers needs work |
| Below 20 | Something structural is wrong |
Worth knowing before you judge yourself against it.
Early-stage companies. A business two years old with heavy investment and small revenue will score badly and may be doing exactly the right thing. The rule is generally applied from around £5–10M ARR upward.
Non-SaaS businesses. It was built for recurring revenue models. Applying it to services or e-commerce produces numbers that do not mean what they appear to.
Deliberate investment periods. A company spending heavily to enter a new market will score poorly for several quarters by design.
SaaS founders benchmarking before a raise. Investors screening a pipeline quickly. Boards deciding whether to push growth or margin next year. Pair it with the MRR and ARR Calculator, the Startup Valuation Calculator and the Equity Dilution Calculator. Our SaaS product team works with companies on both sides of the 40 line.
Enter growth and margin above. If you score below 40, the split tells you which lever to pull.
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