The Rule of 40 is a benchmark for subscription businesses stating that the revenue growth rate plus profit margin should equal or exceed 40%. It balances growth against profitability, allowing fast growers to run at a loss and slower growers to be highly profitable. It is a quick health check for SaaS.

The Rule of 40 is the test for whether your growth is worth its cost. Burning cash is acceptable if you are growing fast enough to clear the bar. If you are below 40, you are neither growing fast enough nor profitable enough, and you need to fix one side. It forces an honest trade-off conversation.

Example:

 A business grows revenue 30% a year at a 15% profit margin. 30 + 15 = 45, clearing the Rule of 40.

Does the Rule of 40 apply to early-stage companies?

 It is most useful for scaling businesses past early revenue. Very early companies often prioritize growth and product-market fit over this benchmark.

Which profit margin should the Rule of 40 use?

 Commonly, an operating or free cash flow margin. Consistency matters more than the exact choice, so the comparison stays meaningful over time.