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Revenue metrics

Rule of 40

Revenue growth rate plus profit margin. A rough test of whether a software business is balancing growth and profitability.

The Rule of 40 says that growth rate plus profit margin should exceed 40%. A business growing 60% while burning 20% of revenue passes; so does one growing 10% at 30% margin.

It is a heuristic, not an accounting identity, and it is most meaningful for businesses past roughly $10m ARR. Below that, growth rates are volatile enough that the number swings on a couple of deals.

Which margin you use matters. Free cash flow margin, EBITDA margin and operating margin give materially different answers, so state the one you mean rather than quoting a bare number.

Related terms

  • ARR (Annual Recurring Revenue) The annualised value of your recurring subscriptions, normally MRR multiplied by twelve, used as the headline size of a subscription business.
  • Burn multiple Net cash burned divided by net new ARR added. How much cash it costs to buy a pound of new recurring revenue.