OnSumoTools

Rule of 40 Visualizer

Score your SaaS health from ARR growth plus profit margin, then see where you sit on the growth-versus-profitability map next to Rule of 40 and 60.

100% client-side. Your ARR and profit inputs never leave this browser (ons-rule-of-40-inputs).

Rule of 40 = ARR growth % + profit margin on ARR. Above 40 signals a healthy balance between growth and profitability for SaaS investors.

Rule of 40 score

32.9

Acceptable for growth stage

ARR growth

42.9%

Profit margin (Free cash flow)

-10.0%

Rule of 40

32.9

Growth vs margin map

Your position on profit margin (horizontal) and ARR growth (vertical). Solid line = Rule of 40; dashed = Rule of 60.

  • Current period
  • Rule of 40
  • Rule of 60

Inputs

Historical quarters (optional)

Up to 8 rows. YoY growth uses ARR from the same quarter one year ago.

No historical rows yet.

How does the Rule of 40 Calculator (SaaS) work step by step?

The Rule of 40 is a SaaS health test. It says a healthy software company's revenue growth rate plus profit margin should equal or exceed 40%. A company growing at 60% with a negative 25% margin scores 35 and falls short. A company growing at 30% with a 15% margin scores 45 and passes. The tool takes your inputs, calculates your combined score, places your company on a four-quadrant chart where the diagonal line at 40 separates companies that pass from those that fall short, and shows where public SaaS benchmarks typically cluster.

What does a typical Rule of 40 Calculator (SaaS) result look like?

Company profile: ARR: $12M. Year-over-year ARR growth: 45%. EBITDA margin: -8%. Rule of 40 Score: 45% + (-8%) = 37%. This company scores 37, which is 3 points below the threshold. It appears in the lower-right quadrant of the chart: growing fast but burning cash. To pass the Rule of 40, it could either grow 3 points faster (48% growth at the same margin) or improve margin by 3 points (-5% margin at the same growth).

Frequently asked questions

  • What is the Rule of 40?

    A SaaS health benchmark: your annual revenue growth rate plus your EBITDA or free cash flow margin should sum to 40 or more. A company growing at 60% can run at minus 20% margin and still pass. A slower-growing company needs positive margins to compensate. Profitable public SaaS companies often score well above 40, while high-growth pre-profit companies rely almost entirely on the growth side of the equation.

  • Which profit margin should I use?

    EBITDA margin is the most common choice for Rule of 40 calculations. Free cash flow margin is an alternative that some public market analysts prefer because it captures capital spending. Use whichever margin your board or investors track, but stay consistent when comparing across time periods.

  • Is the Rule of 40 still relevant?

    Yes. Despite market shifts, the Rule of 40 remains a standard screening metric in SaaS investing. Bessemer's Cloud Index, Meritech Capital, and most SaaS-focused VCs reference it in their annual reports. Some analysts now use a 'Rule of X' variant that weights growth more heavily, but the original Rule of 40 is still the default benchmark.

  • What if my score is below 40?

    A score below 40 does not mean your company is failing. It means you are currently trading off growth and profitability in a way that does not meet the benchmark. Many successful SaaS companies spend years below 40 during heavy investment phases. The score is a snapshot, not a verdict.

  • Can early-stage startups use this?

    Yes, but the score is most meaningful for companies with at least $5M in ARR. Below that, growth rates are volatile and margins are heavily negative, which makes the combined score unreliable as a benchmark. The tool still works for directional tracking even at early stages.

  • What is the Rule of X?

    The Rule of X is a variant proposed by Bessemer Venture Partners in 2023. It multiplies growth by a factor (typically 2x or 3x) before adding margin, giving more credit to fast-growing companies. The formula is: Score = (growth rate x weight) + margin. This tool uses the original Rule of 40 formula.

Related tools

The idea behind the rule

A software company can grow fast or earn profit. Doing both at once is hard. The Rule of 40 says the two should add up to at least 40. Growth rate plus profit margin, as percentages.

So 50 percent growth with a minus 10 margin scores 40. And 15 percent growth with a 25 percent margin also scores 40. Different companies, same result. That's the point: it lets you trade one for the other without being judged on only one.

Which numbers to enter

Use ARR growth year over year for the growth side. For margin, pick one definition and stick with it. Free cash flow margin and operating margin are the usual choices. EBITDA margin is common too, but it flatters companies with heavy capitalized costs.

Whatever you pick, say so when you show the score to someone. A 45 on EBITDA and a 45 on free cash flow aren't the same claim.

Reading the scatter map

The chart plots growth on one axis and margin on the other. A diagonal line marks 40. A second line marks 60, which is exceptional. Where your dot sits tells you at a glance whether you're above or below.

You can also add quarterly history. A dot that moves toward the line over time tells a better story than a single reading.

If you're under 40

Don't panic. Early-stage companies miss it on purpose, since they spend heavily to grow. A seed-stage startup at 120 percent growth and minus 90 margin scores 30, and that can be the right plan.

Later on, a miss means looking at the weaker side. If growth is slowing, check churn and sales efficiency. If margin is thin, check gross margin and hiring pace. The magic number and CAC payback tools can help with each.

Where it falls short

The rule is a shortcut. It ignores company size, stage and market. It also treats a point of growth the same as a point of margin, which isn't always fair. Some investors prefer weighting growth more heavily, a version often called the Rule of X.

Use the score as a conversation starter, not a verdict. Your numbers stay in your browser, so try a few what-if cases before a board meeting.