Quick Answer (TL;DR)
Rule of 40 measures combined growth rate and profit margin. The formula is Revenue growth rate + Profit margin. Industry benchmarks: >40% is excellent. Track this metric when benchmarking overall company health.
What Is Rule of 40?
Combined growth rate and profit margin. This is one of the core metrics in the revenue metrics category and is essential for any product team serious about data-driven decision making.
Rule of 40 connects product performance to business sustainability. Revenue metrics translate user behavior into financial outcomes, making them essential for board reporting, investor communication, and strategic planning.
Understanding rule of 40 in context, alongside related metrics, gives you a more complete picture than tracking it in isolation. Use it as part of a balanced metrics dashboard.
The Formula
Revenue growth rate + Profit margin
How to Calculate It
Apply the formula Revenue growth rate + Profit margin using data from a consistent time period. Pull the values from your analytics platform or data warehouse, compute the result, and compare against the benchmarks below.
Benchmarks
>40% is excellent
Benchmarks vary significantly by industry, company stage, business model, and customer segment. Use these ranges as starting points and calibrate to your own historical data over 2-3 quarters. Your trend matters more than any absolute number. Consistent improvement is the goal.
When to Track Rule of 40
When benchmarking overall company health. Specifically, prioritize this metric when:
- You are building or reviewing your metrics dashboard and need revenue indicators
- Leadership or investors ask about revenue performance
- You suspect a change in product, pricing, or go-to-market strategy has affected this area
- You are running experiments that could impact rule of 40
- You need a quantitative baseline before making a strategic decision
How to Improve
- Optimize pricing regularly. Most companies set pricing once and forget it. Review pricing quarterly, test willingness to pay, and ensure your pricing reflects the value you deliver.
- Focus on expansion revenue. Growing revenue from existing customers is 5-7x cheaper than acquiring new ones. Build upgrade paths, usage-based pricing tiers, and cross-sell opportunities.
- Reduce involuntary churn. Failed payments account for 20-40% of SaaS churn. Implement dunning flows, card update reminders, and retry logic to recover revenue automatically.
Common Pitfalls
- Optimizing one side at the expense of the other. Improving the ratio by cutting the denominator (e.g., reducing investment) can be counterproductive. Always consider both sides together.
- Ignoring revenue quality. Not all revenue is equal. Revenue from customers likely to churn, deeply discounted deals, or one-time contracts should be weighted differently than high-quality recurring revenue.
- Measuring without acting. Tracking this metric is only valuable if you have a process for reviewing it regularly and a playbook for responding when it moves outside acceptable ranges.
Related Metrics
- Runway: months of operation remaining at current burn
- Monthly Burn Rate: net cash spent per month
- Average Selling Price (ASP): average price at which your product is sold
- Average Contract Value (ACV): average annualized value of a customer contract
- Product Metrics Cheat Sheet: complete reference of 100+ metrics
Further Reading
- Bessemer Venture Partners on the Rule of 40: Rule of 40 scores for top public cloud companies and how the metric is used in enterprise SaaS valuations
- Tomasz Tunguz on the Rule of 40 in practice: analysis of how growth rate and margin trade-offs affect the Rule of 40 at different company stages
- SaaStr on why the Rule of 40 matters: how public market investors use the Rule of 40 to evaluate SaaS company health