1. What is the Rule of 40?

The Rule of 40 is a principle that states a healthy SaaS company's combined revenue growth rate and EBITDA margin should equal or exceed 40%. It helps balance growth and profitability in software businesses.

2. How Does the Calculator Work?

The calculator uses the Rule of 40 formula:

Where:

• Revenue Growth % — Year-over-year revenue growth percentage
• EBITDA Margin % — Earnings Before Interest, Taxes, Depreciation and Amortization as percentage of revenue

Interpretation: A score of 40% or higher indicates a balanced, healthy SaaS business model.

3. Importance of Rule of 40

Details: The Rule of 40 helps SaaS companies and investors evaluate the trade-off between growth and profitability. It's particularly useful for assessing growth-stage software companies.

4. Using the Calculator

Tips: Enter your annual revenue growth rate and EBITDA margin as percentages. Both values should be from the same period for accurate calculation.

5. Frequently Asked Questions (FAQ)

Q1: Why is 40% the benchmark?
A: Empirical data shows that SaaS companies balancing growth and profitability at this level tend to be sustainable and valuable.

Q2: Can you exceed 100% on the Rule of 40?
A: Yes, if you have extremely high growth (e.g., 80% growth + 30% EBITDA margin = 110%).

Q3: Should early-stage companies follow this rule?
A: Early-stage companies often prioritize growth over profitability, so may intentionally score below 40%.

Q4: What's more important - growth or profitability?
A: The Rule of 40 suggests they're equally important when combined, but optimal balance depends on company stage and market conditions.

Q5: Does this apply to non-SaaS businesses?
A: While primarily for SaaS, the concept can be adapted for other recurring revenue business models.