Rule of 40: Definition, Formula & SaaS Benchmarks
What is Rule of 40?
The Rule of 40 is a SaaS health benchmark stating that a company's revenue growth rate plus its profit margin should equal or exceed 40. It captures the trade-off between growth and profitability in a single score, allowing investors to evaluate companies at different stages side by side.
Formula
Rule of 40 = Revenue Growth % + FCF Margin %Worked Example
If a company grows revenue 30% YoY and runs a 15% FCF margin, its Rule of 40 score is 45 — above the threshold, signalling healthy performance. A company growing 60% with a −20% FCF margin also scores 40, reflecting an acceptable growth-efficiency balance.
What Good Looks Like
Thresholds derived from live data across 172 public SaaS companies tracked on SaaSDB.
Live Rankings
View full rankings →| Rank | Company | Rule of 40 |
|---|---|---|
| #1 | Gloo Holdings, Inc.(GLOO) | 221.4 |
| #2 | INTUIT INC.(INTU) | 162.0 |
| #3 | Applied Digital Corp.(APLD) | 118.6 |
| #4 | Block, Inc.(SQ) | 99.5 |
| #5 | Reddit, Inc.(RDDT) | 98.8 |
| · · · | ||
| #168 | Veritone, Inc.(VERI) | -137.3 |
| #169 | DigitalBridge Group, Inc.(DBRG) | -80.5 |
| #170 | WEX Inc.(WEX) | -59.6 |
| #171 | BigBear.ai Holdings, Inc.(BBAI-WT) | -53.0 |
| #172 | BigBear.ai Holdings, Inc.(BBAI) | -53.0 |
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Frequently Asked Questions
Is the Rule of 40 the same as profitability?
No. The Rule of 40 combines growth and profitability. A highly profitable but slow-growing company can score just as well as a fast-growing but unprofitable one, as long as both components add up to 40.
What Rule of 40 score is good for early-stage SaaS?
Early-stage companies with growth rates above 80% can afford significant losses and still clear 40. As growth slows, profitability must improve proportionally to maintain a healthy score.
How often should you calculate Rule of 40?
Most investors calculate it quarterly using the most recent trailing-twelve-month revenue growth and FCF margin. Annual calculations smooth seasonality but may lag market movements.
Which margin does the Rule of 40 use — FCF or operating?
Practitioners use different margins. FCF margin is most common among public market investors; some use operating margin or EBITDA margin. Consistency within comparisons matters more than the specific choice.
Related reading
Ara Housepian
Founder & Lead SaaS Analyst, Araho Digital
Ara is the founder of Araho Digital and SaaSDB. He has spent over a decade in software development, SaaS operating metrics modeling, and investment data analysis. Ara holds a degree in Computer Science and focuses on building financial tooling and data pipelines that make institutional-grade SaaS benchmarking accessible to growth operators.
format_quoteCite This Data
Data sourced from SEC EDGAR filings · Updated daily · As of 2026-05-22
SaaSDB (2026). Rule of 40: Definition, Formula & SaaS Benchmarks. Retrieved 2026-06-08 from https://saasdb.app/glossary/rule-of-40/<a href="https://saasdb.app/glossary/rule-of-40/">Rule of 40: Definition, Formula & SaaS Benchmarks — SaaSDB</a>[Rule of 40: Definition, Formula & SaaS Benchmarks](https://saasdb.app/glossary/rule-of-40/)