Work out your Rule of 40 score from growth rate and profit margin, then see how retention changes the revenue multiple an acquirer or investor is likely to apply to your ARR.
33.3% growth + 10.0% margin
You clear the benchmark. Fundamentals look healthy and investors generally view this range favourably.
Current ARR
$1.20M
Revenue multiple
7.0x to 12.0x
Valuation range
$8.40M to $14.40M
Retention quality
Average retention
Implied annual churn
22%
Average customer lifetime
50 months
The base multiple comes from your Rule of 40 band, then it is adjusted up or down for retention. This is a directional estimate, not a formal valuation. Real outcomes also depend on market conditions, gross margin, contract length, concentration risk, and the quality of your team.
A score of 43.3 puts you in good territory. The usual next step is defending it: protect margin as you scale and keep acquisition costs from creeping up as you add channels.
The Rule of 40 is a shorthand for whether a software business is trading growth and profitability sensibly. Add your year over year revenue growth rate to your profit margin. If the two together reach 40 or more, the business is considered balanced. A company growing 60 percent while burning 20 percent of revenue scores the same 40 as a company growing 10 percent at a 30 percent margin, and investors treat both as reasonable uses of capital.
It became popular because it resolves an argument that comes up in every board meeting. Growth alone can hide an unsustainable cost structure, and profit alone can hide a business that has stopped competing. One number forces both into the same conversation.
The formula
Rule of 40 = revenue growth rate (%) + profit margin (%)
Use year over year ARR growth for the first term. For the second, most SaaS teams use EBITDA margin because it strips out depreciation and shows operating reality, though operating margin or free cash flow margin are both defensible as long as you stay consistent between periods.
Scores map loosely onto revenue multiples. The bands below are the ones this calculator uses before adjusting for retention.
Premium territory. You are balancing growth and profitability better than most of the market.
Typical multiple: 10x to 15x ARR
You clear the benchmark. Fundamentals look healthy and investors generally view this range favourably.
Typical multiple: 7x to 12x ARR
Below the benchmark but workable. Usually one lever, growth or margin, needs deliberate attention.
Typical multiple: 4x to 8x ARR
Both growth and profitability need improvement before the business looks investable at a premium.
Typical multiple: 2x to 5x ARR
Two companies can post an identical Rule of 40 score and still be worth very different amounts. The difference is usually retention. If you lose 5 percent of customers every month, close to half your base disappears within a year, and a large share of your sales effort goes into standing still rather than growing. Revenue that has to be reacquired every year is worth less than revenue that renews on its own.
That is why this calculator applies a retention adjustment on top of the base multiple. Below 1 percent monthly churn the multiple is increased, and above 3 percent it is reduced. The adjustment is deliberately modest, because churn is one input among many, but it reflects how acquirers actually price durability.
Monthly churn of 3 percent is roughly 31 percent a year. At 5 percent it is about 46 percent. Small monthly differences become very large annual ones.
Revenue you keep costs nothing to win again. Cutting churn improves growth and margin simultaneously, which is why it moves the Rule of 40 faster than most tactics.
Investors pay more for revenue they can forecast. Low churn signals product fit and reduces the risk attached to every future year of cash flow.
There are only two levers, growth and margin, but the tactics under each differ a lot in how much they cost you.
Affiliate and partner programs are unusual because they push on both terms at once. Commissions are only paid after a sale closes, so acquisition cost stays tied to revenue rather than to budget. That lifts the growth term without the fixed spend that would normally pull the margin term down. For teams sitting just below 40, it is often the cheapest available point of improvement.
Use year over year growth. Compare your ARR today against ARR from twelve months ago. Quarterly or monthly growth rates annualised tend to overstate the picture because they magnify one good period, which is why this calculator defaults to deriving growth from two ARR figures.
EBITDA margin is the most common choice for SaaS because it excludes depreciation and amortisation and gets closer to operating reality. Operating margin and free cash flow margin are both acceptable alternatives. What matters most is using the same definition every time you measure, so the trend stays meaningful.
Not really. A seed or Series A company is usually expected to trade margin for growth, and a score well below 40 is normal at that stage. The metric becomes a fair test once revenue is predictable and the business has enough scale that the cost structure is a genuine choice rather than a constraint, which for most teams is somewhere past a few million in ARR.
Because retention determines how durable your revenue is. Two companies with the same score are not equally valuable if one keeps customers for five years and the other for eighteen months. This calculator raises the multiple for monthly churn under one percent and lowers it above three percent, which mirrors how buyers discount revenue that has to be constantly replaced.
It is a signal, not a verdict. A score in the twenties or thirties usually means one lever is lagging rather than both. Look at which term is further from where it should be. If growth is the weak side, the fix is channel related. If margin is the weak side, the fix is usually cost structure or pricing. Companies move between bands regularly.
Treat it as a starting point for a conversation, not a number to put in a term sheet. It is built from revenue multiples that are common in SaaS and adjusted for retention, but real valuations also account for gross margin, net revenue retention, customer concentration, contract length, competitive position, and the market environment at the time of the deal.
Net revenue retention is a better single measure if you have it, because it captures expansion alongside losses. This calculator asks for monthly churn because it is the figure most teams can pull quickly. If your expansion revenue is strong enough that net retention sits above one hundred percent, your effective retention is better than a raw churn number suggests.
Yes, though it is rare and usually temporary. It happens when a highly profitable company posts an unusually strong growth year, often after a pricing change or a large contract. Scores that high tend to normalise, so it is worth checking whether the growth is repeatable before treating it as the new baseline.
Arkvon lets you launch an affiliate program where partners are paid only when revenue lands. Your growth term goes up, your margin term stays intact, and the people promoting your product earn more too.
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