Rule of 40

A benchmark for software companies adding revenue growth rate and profit margin, with a combined score of 40 or more often seen as healthy.

Example

30% growth plus a 10% margin gives 40.

Important

It is a rough guide for more mature companies and says little about very early ones.

Related terms

  • Net Revenue Retention (NRR) — Revenue from a group of existing customers now, divided by revenue from the same customers a year earlier, including upgrades and subtracting cancellations and downgrades.
  • Gross margin — Gross profit - revenue less the cost of goods sold - expressed as a percentage of revenue. It asks whether the thing being sold makes money.

Lessons that explain it

  • SaaS lives on retention; marketplaces live on liquidity and take rate — Software businesses are judged on recurring revenue, expansion and margins. Marketplaces are judged on whether buyers and sellers reliably find each other, and how much of each transaction the platform keeps. (12 min)

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