Rule of 40 Calculator
Score a SaaS business on the Rule of 40 using ARR growth and any margin definition, compare the trade-off between growth and profitability, and see what each lever is worth.
Last reviewed by the Radiatus Cloud team
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One number for two things investors care about
The Rule of 40 says that a healthy software business should have a growth rate and a profit margin that together reach at least forty. A company growing eighty percent while burning forty percent of revenue scores forty. So does a company growing ten percent at a thirty percent margin. The heuristic exists because the two are substitutes at the point of investment: a business may buy growth with margin or bank margin instead of growing, and the combination is what indicates whether the spending is producing anything.
Which margin, and which growth
The rule is stated loosely enough that people compute it differently, which is why comparisons across companies so often disagree. Growth is usually year on year revenue or ARR growth, but some use forward ARR. Margin is most commonly free cash flow margin, sometimes EBITDA margin, occasionally adjusted operating margin with stock compensation excluded. Each choice moves the score by several points, so the definition matters as much as the arithmetic and should be stated whenever the number is quoted.
Reading the result honestly
A score below forty is not a failure; it is a signal that the current mix of growth and spending is not producing enough of either. The useful analysis is not the score but the trade-off: how much margin you could give up to buy a point of growth and stay level, or how much growth you would need to justify a planned increase in spend. This calculator reports both alongside the score, because that is the conversation the number is meant to start.
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Frequently Asked Questions
Which margin should I use?
Free cash flow margin is the most common in public SaaS reporting and the most conservative. EBITDA margin is more forgiving because it excludes stock compensation and capital expenditure. Whichever you use, state it, because the same company can score ten points apart under the two definitions.
Is 40 the right target for every company?
No. It is a benchmark for scaled software businesses, typically past twenty to thirty million in ARR. Early companies growing at triple digits routinely score far above it, and companies below ten million in revenue have too much noise in both inputs for the score to mean much.
Does the rule apply to non SaaS businesses?
It was designed for subscription software, where gross margins are high and revenue is recurring. Applying it to a business with forty percent gross margins or one off revenue produces a number that looks comparable and is not.
What score is considered good?
Above forty is the bar, above sixty is strong, and the best performing public software companies sit in the fifty to seventy range. Below twenty usually indicates a business spending heavily without buying proportionate growth.
Should I use ARR or GAAP revenue?
ARR growth is more common in private company reporting and reacts faster to changes. GAAP revenue growth is what public markets use and lags ARR by roughly a quarter. Comparing an ARR growth figure to a public company GAAP figure overstates your position.
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How to Use
Enter growth rate and profit margin to get the Rule of 40 score and the trade-off analysis.
Disclaimer: This tool is provided "as is" without warranty of any kind. Results are for educational and utility purposes.
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