# 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%.

- **URL**: https://dodopayments.com/glossary/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

- It provides a single, high-level metric to evaluate the overall performance of a SaaS business.

- Companies that meet or exceed the Rule of 40 often command higher valuations from investors.

- It helps management decide whether to prioritize growth or profitability at different stages of the company's life.

## Learn More

- [SaaS metrics and KPI guide](https://dodopayments.com/blogs/saas-metrics-kpi)
- [How to build predictable recurring revenue](https://dodopayments.com/blogs/build-predictable-revenue)
- [Recurring revenue models and benchmarks](https://dodopayments.com/blogs/recurring-revenue)