Rule of 40 Calculator
The Rule of 40 states that a healthy SaaS company should have revenue growth rate plus profit margin exceeding 40%. This metric balances growth against profitability, recognizing that companies can trade off between the two while maintaining overall health.
How to Calculate
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Rule of 40 Score = Revenue Growth Rate (%) + Profit Margin (%)
Example 1 (Growth focus):
Growth: 60%, Margin: -10%
Score = 60 + (-10) = 50 ✓
Example 2 (Profit focus):
Growth: 20%, Margin: 25%
Score = 20 + 25 = 45 ✓
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Industry Benchmarks
| Score | Rating | Typical Profile |
|---|---|---|
| <20 | Poor | Struggling company |
| 20-40 | Acceptable | Growing or transitioning |
| 40-60 | Good | Healthy SaaS |
| >60 | Excellent | Top performer |
Interpreting Your Results
The Rule of 40 allows flexibility in business model. High-growth companies can run at a loss; mature companies need profitability. Public SaaS companies averaging above 40% typically trade at premium valuations.
Why This Metric Matters
Understanding Rule of 40 helps you:
- Make data-driven business decisions with confidence
- Benchmark against industry standards and competitors
- Identify areas for improvement in your business model
- Communicate performance clearly to stakeholders and investors
- Set realistic goals and track progress over time
Best Practices for Accurate Measurement
1. Use consistent time periods: Compare month-over-month or quarter-over-quarter consistently 2. Include all relevant data: Ensure you capture all revenue sources and costs 3. Track cohorts separately: Analyze metrics by customer segment and acquisition date 4. Monitor trends: Single snapshots are less valuable than trends over time 5. Automate tracking: Use analytics tools to ensure consistent, accurate measurement
Every Metric From These Inputs
100 customers at $49 with 3% monthly churn and $200 CAC:
| Metric | Value | Formula |
|---|---|---|
| MRR | $4,900 | customers × ARPU |
| ARR | $58,800 | MRR × 12 |
| Annual churn | 30.6% | 1 − (1 − monthly)¹² |
| Average lifetime | 33.3 months | 1 ÷ monthly churn |
| LTV | $1,633 | ARPU ÷ monthly churn |
| LTV : CAC | 8.2:1 | LTV ÷ CAC |
| CAC payback | 4.1 months | CAC ÷ ARPU |
What Good Looks Like
| Metric | Healthy | Concerning |
|---|---|---|
| Monthly churn (SMB) | Under 3% | Above 5% |
| Monthly churn (enterprise) | Under 1% | Above 2% |
| LTV : CAC | 3:1 or better | Below 1:1 |
| CAC payback | Under 12 months | Above 18 |
| Net revenue retention | Above 100% | Below 90% |
The Metric This Set Omits
Net revenue retention — expansion revenue minus churn and contraction, from existing customers only. Above 100% means the business grows without acquiring anyone, which is the single strongest signal in SaaS and the one that most affects valuation. It cannot be derived from the inputs above because it needs upgrade and downgrade data.