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 57 public SaaS companies tracked on SaaSDB.
Live Rankings
View full rankings →| Rank | Company | Rule of 40 |
|---|---|---|
| #1 | DigitalBridge Group, Inc.(DBRG) | 190.1 |
| #2 | Palantir Technologies Inc.(PLTR) | 103.1 |
| #3 | Duolingo, Inc.(DUOL) | 74.3 |
| #4 | Veeva Systems Inc.(VEEV) | 60.5 |
| #5 | Datadog, Inc.(DDOG) | 56.9 |
| · · · | ||
| #53 | Domo, Inc.(DOMO) | -0.1 |
| #54 | Zuora, Inc.(ZUO) | 2.3 |
| #55 | Trimble Inc.(TRMB) | 7.5 |
| #56 | Momentive Global Inc.(MNTV) | 10.1 |
| #57 | Bandwidth Inc.(BAND) | 10.9 |
Advertisement
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.