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Rule of 40
Definition
A performance benchmark for SaaS and subscription businesses stating that the sum of revenue growth rate and profit margin should equal or exceed 40%. The Rule of 40 balances growth and profitability and is widely used by investors to assess whether a company is creating sustainable enterprise value.
Related Terms
Real Options Analysis
Recurring Revenue
Regulatory Capital
Relational Capital
Relief-from-Royalty Method
Related FAQ
The Rule of 40 states that a company's growth rate plus profit margin should total 40% or more — companies scoring below 40% risk unsustainable unit economics or insufficient growth.
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