What Is Rule of 40? The SaaS Health Metric Explained

What is rule of 40 and why has it become the most widely cited health metric for SaaS companies? It is the combined score of a company's revenue growth rate and profit margin — when the two add up to 40 or more, the business is considered financially healthy regardless of whether it prioritizes growth or profitability.

After this guide you'll know the formula, what counts as a strong score at different growth stages, and how to calculate it in a spreadsheet.

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What is the formula for this metric?Which profit margin should I use in the calculation?What score counts as good for an early-stage SaaS company?How do I calculate it in a spreadsheet?How does it relate to the efficiency score and magic number?

What this export contains

Quarter

ARR

Revenue Growth %

EBITDA Margin %

Rule of 40 Score

Gross Margin %

Operating Expenses

Headcount

What usually goes wrong with it

Which profit margin to use is unclear
Some analysts use EBITDA margin; others use free cash flow margin or operating margin. Using different denominators makes cross-company comparisons meaningless.
DataMimi Use EBITDA margin consistently as your profit denominator — it's the most common convention in SaaS benchmarking and makes your score comparable to industry data from Bessemer and other publications.
Growth-stage companies always look different from profitability-stage ones
A company growing at 80% with negative 40% margins scores 40. A profitable company at 20% growth with 20% margins also scores 40. The metric treats them equally, which misses growth stage context.
DataMimi Score above 40 is the threshold; above 60 is exceptional — use this as a filter, not a target. A company at 80% growth with negative 40% margin is investing in future efficiency, not underperforming.
Annual vs trailing twelve month calculation produces different results
Point-in-time annual figures can look very different from a rolling TTM score, especially during quarters with one-time items or uneven seasonality.
DataMimi Calculate on a trailing twelve month basis — TTM smooths out quarterly noise and makes your score comparable to public company filings and benchmark datasets.

Common questions

What is rule of 40 and how is it calculated?

It is revenue growth rate plus profit margin. If your company grows at 50% annually and has a negative 5% EBITDA margin, your score is 45 — above the 40 threshold considered healthy.

What is a good score for a Series B SaaS company?

Scores above 40 are considered healthy. Top-quartile Series B companies score 60+. Companies below 20 face pressure from investors to either accelerate growth or improve margins.

Which profit margin is used in the standard formula?

EBITDA margin is the most common convention in SaaS benchmarking. Some frameworks use free cash flow margin instead — check which definition a benchmark report uses before comparing your score.

How does Datamimi help calculate this score?

Upload your quarterly P&L or financial export and ask Datamimi to calculate the score for each period, identify the trend, and flag quarters that fall below the threshold.

How much does Datamimi cost?

Free plan: $0/month, 40 credits, no credit card required. Lite: $9/month, 400 credits. Starter: $24/month, 1,500 credits, up to 3 simultaneous files. Pro: $59/month, 5,000 credits with rollover. Team: $199/month, 20,000 credits, 5 users.

Try it with your own file

DataMimi reads the file you actually have — merged cells, headers below row one, totals pasted at the bottom — and shows which rows and columns every number came from.

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