Rule of 40
This metric is defined in Core Metrics. Finance references it as a key outcome metric.
Rule of 40: A heuristic that balances growth and profitability. A healthy SaaS company's growth rate plus profit margin should equal 40% or more.
Formula
Rule of 40 = ARR Growth Rate (YoY %) + EBITDA Margin (%)Benchmarks
- Below 20: Struggling (Median public SaaS Q1 2025: 12-15%)
- 20-40: Developing (Median mid-2024: 34%)
- 40+: Healthy balance of growth and profitability
- 60+: Elite (top quartile: 45%+ growth component)
What It Tells You
Whether you're balancing growth and profitability appropriately. You can grow fast and lose money, or grow slow and be profitable, but the sum should hit 40.
Dual-Lens Note
The Rule of 40 is a composite metric. Its dual-lens behaviour is inherited from its inputs: - **Rule of 40-O** = ARR-O Growth Rate + Contribution Margin (GM-O) - **Rule of 40-M** = ARR-M Growth Rate + EBITDA Margin A company with 30% ARR growth and heavy implementation costs might report Rule of 40-M = 45 (healthy) while Rule of 40-O = 32 (below threshold). The gap reveals whether growth-profitability balance holds when true operating costs are included. No separate O/M inclusion rules are needed — use the ARR and Gross Margin forms defined above.
Sources
GASP Standard v1 · Last updated