Business Glossary
What Is the Rule of 40?
The Rule of 40 is a performance benchmark for SaaS and technology businesses, stating that revenue growth rate plus profit margin should equal or exceed 40%. It balances growth (requiring investment) against profitability (reflecting efficiency).
The Formula
Rule of 40 Score = Annual Revenue Growth Rate % + Profit Margin %
Worked Example — UK SME
A UK SaaS business grows revenue at 35% year-on-year and operates at 8% net margin. Rule of 40 score = 35 + 8 = 43. Above 40 — the business is performing well on the combined growth-profitability metric.
UK Benchmark
📊 Scoring above 40 indicates a healthy balance of growth and profitability. Most relevant for businesses with recurring revenue and scalable models. Less relevant for traditional retail, manufacturing, or distribution businesses.
Common Questions
Does the Rule of 40 apply to all UK SMEs?
Primarily relevant to SaaS, software, and recurring-revenue technology businesses. For traditional SMEs in manufacturing or distribution, sector-specific margin benchmarks are more appropriate.
What is more important — growth or profitability in the Rule of 40?
At early stage, growth is usually weighted more heavily — a business growing at 60% with –10% margin scores 50 and is clearly investable. At scale, investors expect the balance to shift towards profitability.
How do investors use the Rule of 40?
As a quick filter for growth-stage technology businesses. Above 40 is typically required for consideration by growth investors. Below 40 is not disqualifying but requires a clear improvement path.
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