Rule of 40: What It Is & How To Calculate It (SaaS)
The Rule of 40 assesses that the company’s growth rate and profitability numbers reach or exceed a combined total of 40%.
For investors, it shows the base numbers without sacrificing one metric for another.
Calculating the Rule of 40
There are two inputs for the Rule of 40: growth and profit margin.
Growth Rate Input
A year-over-year evaluation of monthly MRR (monthly recurring revenue) will yield the growth rate.
Profit Margin Input
To find profit margins, the EBITDA margin is one of the most commonly used metrics for finding the Rule of 40 in the SaaS world.
Profit vs. Growth
there is always a tradeoff between growth and profit.