The rule of 40
Why this metric separates winners from pretenders
Time: 3.50 Minutes
Most SaaS founders obsess over vanity metrics…
Just read any fancy startup news blog and you will hear loads of great sounding numbers and 6 months later the company is bankrupt.
But smart founders only care about one number:
The rule of 40.
This simple formula reveals everything about your business health. Therefore you should master it now...
What exactly is the Rule of 40?
Revenue growth rate + profit margin = your score.
If you're growing 30% annually with 15% margins, you hit 45. That's excellent.
So 40+ means you're winning.
Below 40? You're burning cash faster than creating value.
The good thing about the rule of 40 is, It forces brutal honesty.
You can't fake growth and profitability simultaneously.
But how do you influence your Rule of 40?
Here are some directions to get you going:
Optimize for efficiency first.
Cut wasteful spending before chasing growth. Clean margins compound.
Focus on retention over acquisition.
Existing customers cost less to grow than new ones.
Automate repetitive processes.
Manual work kills margins at scale. So use AI.
Price based on value delivered.
Underpricing destroys your rule faster than anything. So learn pricing.
Yet most founders ignore this metric completely. Why?
Growth feels sexier than profitability. We celebrate revenue milestones, not margin improvements.
Venture capital culture rewards "growth at all costs" thinking.
The reality hits when funding dries up.
While you're burning cash for growth, profitable competitors survive downturns and buy distressed assets.
The Rule of 40 doesn't lie. Your metrics in your pitch deck might.
So keep optimizing both sides, and stay curious.
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