The Rule of 40 in SaaS Explained
By Michael Chen | August 19, 2025
The Rule of 40 helps founders balance growth and profitability. If your growth rate plus profit margin equals 40% or more, investors consider your SaaS business healthy.
What Is the Rule of 40?
Add your year-over-year revenue growth percentage to your profit margin. A combined score of 40 or higher shows that you are scaling efficiently.
Why It Matters
The metric gives investors a quick snapshot of risk. Fast-growing but unprofitable companies can still meet the Rule of 40, while slow-growth firms need stronger margins.
How to Improve Your Score
Boost retention, optimize pricing, and streamline operations to increase both growth and profitability. Even a few points improvement can raise your valuation multiple.
Check Your Valuation
Use our free valuation calculator or upgrade to the pro valuation calculator for deeper insights into how the Rule of 40 impacts your worth.
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