The Rule of 40 says revenue growth plus profit margin should exceed 40%. Learn how it summarizes a SaaS KPI tree.
The Rule of 40 states that a healthy SaaS company's year-over-year revenue growth rate plus its EBITDA (or FCF) margin should sum to at least 40%. It is a single-number summary of the growth-vs-profitability trade-off. In a KPI tree, the Rule of 40 sits at the very top as a derived health score, with growth rate and margin as its two child branches, each decomposing further into acquisition, retention, and cost drivers.