SaaS Rule of 40 calculator

Rule of 40 — SaaS's single best one-number test

Rule of 40 = revenue growth rate + EBITDA margin

A SaaS company that grows 50% YoY at -10% EBITDA margin scores 40. Same company growing 20% at +20% margin also scores 40. The thesis: investors should value either profile equally — growth and profitability are interchangeable in the long run.

Public benchmarks (recent)

• Top decile: 60+ (Snowflake at IPO, MongoDB, CrowdStrike at peak)
• Top quartile: 45-55 (most healthy public SaaS)
• Median: ~30 (most public SaaS in 2023-24 reset)
• Bottom quartile: <20 (struggle profile — slow growth + losses)

Where the rule breaks down

• Late-stage scaling: a $500M ARR company growing 30% with breakeven margin (R40 = 30) is far more valuable than a $20M ARR company growing 25% at -50% margin (R40 = -25). Absolute dollars matter.
• Free cash flow vs EBITDA: stock-based comp pollutes EBITDA. FCF margin is harder but more honest.
• One-time effects: layoffs spike margin temporarily; mid-year price hikes spike growth. Look at TTM trends.

How to improve a low score

• Cut S&M efficiency loss: reduce sales budget per dollar of new ARR — fastest improvement
• Price harder: existing-customer expansion + 10-15% list price increase = ARR growth + margin lift
• Reduce churn: 1pt of churn reduction worth ~3pts of R40 long-term