Rule of 40
A software industry benchmark stating that a healthy SaaS business should have its ARR growth rate plus its profit margin (FCF or EBITDA margin) sum to 40% or greater.
What it shows
Rule of 40 balances growth and profitability, showing whether the business is making an intelligent trade-off between the two. A score below 40 signals the business is neither growing fast enough nor generating sufficient profit to justify its cost structure.
Formula
Rule of 40 Score = ARR Growth Rate (%) + FCF Margin (% of revenue). Example: 60% ARR growth + −20% FCF margin = score of 40.
Tracked in these industries
SaaS B2B
Subscription-based software sold to businesses. Long sales cycles, multi-stakeholder procurement, and recurring revenue tracked through ARR, NRR, and churn.
SaaS B2C
Subscription software sold directly to individuals. Self-serve, high volume, short cycles — revenue operations focused on activation, retention, and reducing involuntary churn.