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SaaS Metrics Library
Rule of 40: Formula, Examples and 2026 Benchmarks
The Rule of 40 says a SaaS company’s revenue growth rate plus its profit margin should add up to 40% or more. Calculate your score, see the 2026 benchmarks, and get practical tips to improve it. ScaleXP calculates the Rule of 40 and 30+ other SaaS metrics straight from your accounting and CRM data, prepared daily.
This article will provide
- Calculation
- Benchmarks
- Improvement
The Rule of 40 measures the growth and profitability of a subscription business in a single number. Add your revenue growth rate to your profit margin: if the total reaches 40% or more, the business is generally considered to be performing well. According to McKinsey, investors reward SaaS companies at or above that level with consistently higher valuation multiples.
Its appeal is that it refuses to let either half of the story stand alone. A business growing 80% year over year while burning heavily scores the same as one growing 10% with a 30% margin. That makes it a fast way for boards, investors and management teams to compare software companies pursuing very different strategies.
Below: a calculator, the formula, current benchmarks for SaaS businesses in 2026, and the questions the metric does not answer.
Rule of 40 calculator
%
%
Growth plus margin: +30% growth, +5% margin Use a minus sign if either figure is negative.
35Rule of 40 score
Keep reading to see how that compares with the industry benchmark.
How your result compares
Your result
35Rule of 40 score
That puts you right at the 2026 median of 25. The top quartile reaches 43 or higher.
Change your numbersOne number against one benchmark only tells you so much. The 2026 benchmark report has the median and top-quartile figures for all 20 metrics, so you can see where the rest of the business sits.
How to Calculate Rule of 40 in SaaS
To calculate the score, add the company’s annual revenue growth rate to its EBITDA or operating profit margin. The formula is:
So a company growing annual revenue 20% with a 20% EBITDA margin scores 40 (20 + 20). Both inputs are percentages and both carry equal weight, so a point of margin counts exactly as much as a point of growth.
Rule of 40 calculation example
Take a SaaS company growing annual revenue by 30% with an EBITDA margin of 5%.
Step 1: Annual revenue growth = 30%
Step 2: EBITDA margin = 5%
Step 3: Add the two together:
30% + 5% = 35%
The score is 35%. That sits below the 40 threshold, though it still describes a business combining strong growth with positive profitability. Reaching 40 from here takes five points from either lever, or any mix of the two.
More worked examples
| Company | Revenue growth | EBITDA margin | Rule of 40 score | Meets 40? |
|---|---|---|---|---|
| Company A | 60% | −15% | 45 | Yes |
| Company B | 30% | 10% | 40 | Yes |
| Company C | 30% | 5% | 35 | No, 5 points short |
| Company D | 10% | 25% | 35 | No, 5 points short |
| Company E | 45% | −30% | 15 | No, 25 points short |
Company A and Company E grow at similar rates, but A converts growth into profit and E spends far more to get it. For comparison, the 2026 median score for B2B SaaS is 25 and the top quartile clears 43 (see the benchmarks below).
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Download the 2026 SaaS Benchmark Report We’ve emailed you a copy as well.How is Rule of 40 used by SaaS companies?
Mostly for benchmarking. Boards and management teams use the score to check whether growth is being bought at a sensible price.
Investors and analysts use it as one input when valuing software companies. It has become common enough that most SaaS board packs carry it.
Its appeal is simplicity. One number covers the trade-off every SaaS business is managing, which is why it survives despite the objections set out below.
Recurring or total revenue: which should you use?
Finance teams often ask whether growth should be measured on recurring revenue or total revenue.
Use total revenue if you report it that way to the board, and recurring revenue if recurring is the number your investors track. What matters is consistency.
Switching between the two between periods makes the trend meaningless, which is the main thing the score is for.
Growth or margin: which lever should you pull?
Arithmetically, neither. The score is a simple sum, so a point of margin is worth exactly a point of growth.
Practically, they are not equal. Growth compounds and margin does not: a point of growth this year raises the base every year after it.
Investors read the two halves differently too. A score of 40 built on 60% growth and a minus 20% margin is valued quite differently from 70% growth and a minus 30% margin, even where the arithmetic matches.
The reason is durability. A score propped up by heavy spend on growth can reverse quickly, and the latest data shows exactly that pattern — the median improved while median growth kept falling, meaning the gain came from cost discipline.
What is a good Rule of 40 score in 2026?
A score of 40 or better remains the investor benchmark. Very few companies clear it.
The median B2B SaaS company scored 25 in the most recent benchmarking year, up from 15 the year before. That is a ten-point jump, and still fifteen points short of the bar.
The spread is wide: the top quartile clears 43, the bottom quartile sits at 7. The metric also only starts to mean much above roughly $20M ARR — below that, scores swing too hard year to year to signal anything.
25%
Median score
43%+
Top quartile
7%
Bottom quartile
+10pts
Up from 15% a year earlier
The median jumped ten points in a year
Median Rule of 40 score, B2B SaaS.
15%
Prior year
25%
Latest
40%
The benchmark
The median company is still fifteen points short of 40. The gap closed sharply, but it closed through margin discipline rather than growth — median growth fell again, to 20%.
Score by growth rate
| Annual growth | Median Rule of 40 |
|---|---|
| Over 50% | 57 |
| Under 10% | 19 |
Only 110 of the 342 companies reported a Rule of 40 score, so the mid-growth bands sit on thin samples and move around. The endpoints are the reliable signal: fast growth carries the score, and it is very hard to reach 40 on margin alone.
Pricing model matters more than people expect
Companies on hybrid subscription plus usage pricing reach 43% at the 75th percentile. Companies on non-seat subscription pricing sit at a 18% median. How you charge shows up in the score.
Source: 2026 Aleph × Benchmarkit SaaS & AI Performance Benchmarks, published 1 June 2026, reflecting full-year 2025 actuals from 342 B2B SaaS and AI-native companies (110 reported Rule of 40).
Connect growth and profit
See the trade-off between growth and margin.
ScaleXP brings recurring revenue growth and profit margin together automatically, so your Rule of 40 stays current and every input can be traced back to the underlying finance data.
Compare growth and profitability using consistent definitions—then see which lever is moving the score.
Automate Your SaaS MetricsExample Rule of 40 view
- Accounting: Xero, QuickBooks, Zoho Books
- Revenue: Contracts and invoices, plus CRM data with Xero or QuickBooks Online
Revenue growth
30%
Measures the annual increase in revenue using a consistent recurring or total-revenue definition.
Illustrative example figures, not your live data.
The limits of the 40 threshold
The score is a summary, and summaries hide things. Three limits are worth holding in mind.
It says nothing about durability. Growth bought through discounting and heavy sales spend counts exactly the same as growth from a product customers renew without being asked. Net revenue retention is what separates the two.
It is sensitive to which profit measure you choose. EBITDA, operating margin and free cash flow margin can differ by many points at the same company. Whichever you use, apply it consistently, and state which one you used when you report the number.
It flatters lumpy revenue. A large one-off implementation fee can lift both growth and margin in the same period, then reverse the following year.
Read it alongside ARR growth, net revenue retention, gross margin and cash generation rather than on its own. Management teams that treat it as a single headline target tend to optimize for the number rather than the business.
Visualizing the score over time
ScaleXP automates the calculation. It integrates with your accounting and CRM systems and applies text recognition to match records, so the score updates itself.
Charts like the one above are interactive, so you can see the underlying detail rather than a single summary figure.
How ScaleXP calculates the Rule of 40
ScaleXP calculates the Rule of 40 automatically from connected finance data. Revenue growth and the profit margin you choose are built from your accounting system — Xero, QuickBooks or Zoho Books. With Xero or QuickBooks Online, CRM records in HubSpot, Salesforce or Pipedrive are added where they help identify recurring revenue. The two components stay visible beside the score, the result updates as each month closes, and every input traces back to the underlying records, so the score can be explained to a board rather than rebuilt in a spreadsheet each quarter.
You can track the Rule of 40 automatically from your CRM and Xero or QuickBooks with ScaleXP, alongside ARR, net revenue retention and gross margin.
Frequently asked questions
Why do investors use the Rule of 40 to judge SaaS companies?
Investors use the Rule of 40 because it balances growth and profitability in one score, so a fast-growing, loss-making company and a slower, profitable one can be compared fairly. The 2026 median Rule of 40 score for B2B SaaS is 25, up from 15, with top-quartile companies at 43 or more and the bottom quartile at 7. Companies growing over 50% post a median of 57. ScaleXP calculates the Rule of 40 automatically, so finance teams can show investors where they stand and which lever to pull.
Can ScaleXP calculate the Rule of 40 automatically from Xero and HubSpot?
Yes, ScaleXP calculates the Rule of 40 automatically by combining revenue growth and EBITDA or operating margin from Xero or QuickBooks Online with revenue data from HubSpot, Salesforce or Pipedrive. ScaleXP tracks the growth and margin components separately, so finance can see which one is moving the score. The metric is prepared daily alongside 30+ other SaaS metrics. Finance teams stop rebuilding the Rule of 40 in spreadsheets and get a score that is ready whenever the board asks.
How does ScaleXP keep the Rule of 40 score consistent with the financials?
ScaleXP keeps the Rule of 40 score consistent with the financials because both growth and margin come directly from the ledger in Xero, QuickBooks or Zoho Books. Finance chooses whether to use recurring or total revenue and how one-off implementation fees are treated, and ScaleXP applies those choices every period so one-off fees do not inflate the score. Because the inputs are the same numbers as the management accounts, the Rule of 40 reconciles to the P&L. Investors get a score that holds up in due diligence.
How does ScaleXP present the Rule of 40 in board packs?
ScaleXP presents the Rule of 40 in live dashboards and PowerPoint board packs as a trend over time, with growth and margin shown side by side so directors see what drove the score. Presentation mode lets the board drill down to the revenue and costs behind each component. Ivan, Financial Manager, says: “Thanks to ScaleXP, our month-end close is now twice as fast!” and “Our investors even commented on the impressive quality of our latest board pack presentations.” Finance teams keep the Rule of 40 ready for every board pack.
What is the Rule of 40 formula?
The Rule of 40 formula adds two percentages: Rule of 40 score = annual revenue growth rate + profit margin, usually EBITDA or free cash flow margin. A company growing 30% with a 10% EBITDA margin scores 40 and meets the rule; the same company with a 5% margin scores 35. In 2026 the median B2B SaaS company scores 25 and the top quartile clears 43 (Aleph × Benchmarkit, 2026 SaaS & AI Performance Benchmarks).
Should the Rule of 40 use EBITDA or free cash flow margin?
Either works, as long as you use the same measure every period and say which one you used. EBITDA margin is the most common in private-company board packs. Free cash flow margin is stricter because it includes capital spending and working capital, and public-market analysts such as Meritech use it. The two can differ by many points at the same company, so compare your score only with benchmarks built on the same measure.
For Xero, QuickBooks and Zoho Books
Keep the Rule of 40 ready for every board pack.
ScaleXP calculates growth and margin from connected finance data, applies your chosen definitions and keeps the Rule of 40 current. See the score, its two components and the underlying movement without rebuilding another board spreadsheet.
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