A rule of thumb for evaluating SaaS company health, stating that a company's growth rate plus its profit margin (typically measured as revenue growth % + profit margin %) should equal or exceed 40%.
Why it matters
The Rule of 40 is a widely used shorthand — particularly among investors — for judging whether fast growth is coming at a reasonable cost, or whether slower growth is at least being offset by strong profitability. A company far below 40% on both dimensions is generally seen as underperforming relative to peers.
In a sentence
"We're growing at 60% but burning cash heavily, so our Rule of 40 score isn't as strong as the growth number alone suggests."