Growth Efficiency

The Rule of 40: Balancing Growth and Profitability

The Rule of 40 helps SaaS founders balance growth and profitability. Learn how to calculate it, interpret it by stage, and improve your score to drive sustainable scale.

Calculate Your Score View Playbooks

Stay Updated

Get battle-tested startup scaling frameworks, proven playbooks, and expert insights delivered weekly.

Join 200+ organizations scaling from chaos to clarity. Unsubscribe at any time.

Loading page...

Stage

Typical Range

Ideal

Seed / Pre-A

<20%

N/A

Series A

20–40%

40%+

Series B

30–45%

50%+

Growth (C+)

40–60%

60%+

5. Common pitfalls

Using ARR growth instead of recognized revenue.

Ignoring seasonality in growth rates.

Comparing across business models (hardware vs SaaS).

Treating it as a goal rather than a guideline.

The Rule of 40 isn’t perfection — it’s direction.
It encourages founders to find the right growth–profit balance for their stage.

The Rule of 40: Balancing Growth and Profitability

The Rule of 40 is a quick litmus test for SaaS financial health — combining growth and profitability into one simple number.
It helps founders and investors evaluate whether your company is scaling sustainably or burning too much to grow.

At a Glance

Formula:
Rule of 40 = Revenue Growth % + EBITDA Margin %

Interpretation:
If your score is 40% or higher, you’re in the healthy zone.

Recommended Diagnostic: Strategic Planning Assessment

1. Why it matters

The Rule of 40 captures the fundamental trade-off between speed and efficiency.
Early-stage SaaS can grow unprofitably, but not indefinitely.
As you scale, capital efficiency becomes a strategic advantage.

Investors now prioritise the Rule of 40 as a shorthand for resilience.

2. How to calculate it

If your company grows 50% YoY and has a –10% EBITDA margin:

[Rule of 40](/glossary#rule-of-40) = 50 + (–10) = 40

A positive result (≥40%) signals balanced, scalable growth.

3. Benchmarks by stage

Stage	Typical Range	Ideal
Seed / Pre-A	<20%	N/A
Series A	20–40%	40%+
Series B	30–45%	50%+
Growth (C+)	40–60%	60%+

Elite SaaS companies consistently achieve Rule of 40 above 50%, balancing expansion with margin control.

4. How to improve your score

Improve gross margins (optimise hosting and support costs).
Slow unproductive growth — reduce inefficient channels.
Streamline operating expenses.
Expand NRR to grow top-line faster with lower acquisition costs.
Align GTM and finance teams on efficiency KPIs.

5. Common pitfalls

Using ARR growth instead of recognized revenue.
Ignoring seasonality in growth rates.
Comparing across business models (hardware vs SaaS).
Treating it as a goal rather than a guideline.

The Rule of 40 isn’t perfection — it’s direction.
It encourages founders to find the right growth–profit balance for their stage.

Ready to benchmark your growth efficiency? Take the free Founder Diagnostic.