Rule of 40
What is Rule of 40?
The Rule of 40 is a principle stating that a healthy SaaS company’s combined growth rate and profit margin should exceed 40%. It balances the trade-off between investing in rapid growth and maintaining profitability.
Why It Matters
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It provides a single, high-level metric to evaluate the overall performance of a SaaS business.
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Companies that meet or exceed the Rule of 40 often command higher valuations from investors.
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It helps management decide whether to prioritize growth or profitability at different stages of the company’s life.
