What Is The Rule Of 40 For SaaS?

The "Rule of 40" has become the gold standard for evaluating SaaS company health because it offers a simple yet powerful way to balance the eternal tension between hypergrowth and profitability.

What is the Rule of 40?

Simply put, your annual revenue growth rate plus your profit margin should equal or exceed 40%.

The beauty of this formula is its flexibility. A company burning cash to fuel 60% growth with a -20% profit margin hits the benchmark just as effectively as a mature player growing at 15% with a comfortable 25% profit margin.

Why should founders care?

Thanks to today's challenging funding environment, the Rule of 40 has shifted from a nice-to-have to a must-have metric. VCs want sustainable businesses that can demonstrate a path to profitability.

Achieving this balance signals to investors that you're building something with staying power, not just chasing vanity metrics at all costs.

How Customer Success Drives the Rule of 40

The Rule of 40 isn't just a financial metric – it's deeply intertwined with your customer strategy. Strong customer success and education programmes are secret weapons for boosting both sides of the equation. 

By reducing churn and driving expansion revenue, effective customer education directly impacts growth. Meanwhile, efficient onboarding and self-service resources lower support costs and improve margins. 

The most successful SaaS businesses are leveraging customer success as the bridge that strengthens both growth and profitability simultaneously.

How to apply it to your startup

If you're falling below 40%, don't panic. Early-stage startups often struggle to hit this benchmark. Instead, use it as a strategic compass:

• Below 20%? You may need to rethink your fundamental business model.

• Between 20-40%? Look for targeted improvements in either growth or margins.

• Above 40%? You're in the sweet spot that attracts premium valuations.

The Rule of 40 isn't the only metric that matters – but it might just be the one that gets your next funding round over the line.