Rule of 40 and Burn Multiple
Two efficiency metrics marketers are now measured on, with formulas, current benchmark ranges, and how marketing spend decisions move each of them.
On this page 7 sections
- What Rule of 40 actually measures, and which margin to use
- Burn multiple and the Craft Ventures bands
- The table that matters: what each marketing decision does to each metric
- Why the 2021 targets are gone
- How to work out your own numbers this week
- The honest limitations of both metrics
- What to do next
- Frequently asked questions
The short answer
Rule of 40 adds revenue growth rate to profit margin, with 40 or above considered healthy. Burn multiple divides net cash burned by net new ARR added, and Craft Ventures grades under 1 as great, 1 to 1.5 good, 1.5 to 2 suspect and over 2 bad. Both are finance metrics that now decide marketing budgets. Which margin you use in Rule of 40, free cash flow or EBITDA, can change the score by 10 points or more.
Key points before you start
Two numbers now decide whether your budget request gets approved, and neither of them is a marketing metric. Rule of 40 and burn multiple are finance measures, but every meaningful marketing decision moves them, usually in a direction and on a timeline that the person asking for the budget cannot explain.
That gap is expensive. Marketing leaders lose budget arguments they should win because they argue in leads while the board argues in efficiency.
What Rule of 40 actually measures, and which margin to use
Rule of 40 is revenue growth rate plus profit margin. Score 40 or more and you are considered healthy. A company growing 30 percent at 10 percent margin and one growing 55 percent at minus 15 percent both clear it.
The part that gets skipped is which margin. Free cash flow margin and EBITDA margin produce meaningfully different scores for the same company, and the gap commonly runs 10 points or more because EBITDA ignores capitalised software development and working capital movements. A company capitalising a large share of engineering payroll can post a respectable EBITDA margin while burning cash steadily.
Always ask which margin
When someone quotes a Rule of 40 score, the first question is free cash flow or EBITDA. If they do not know, the number is not comparable to anything. Public company scores in the press are quoted both ways, often without saying which.
Use free cash flow margin internally. It is the harder number and it is the one that tracks whether the business is actually self-funding. Use whichever version your comparables use when you are talking to investors, and say which you used.
10+ points
Typical difference between a Rule of 40 score calculated on EBITDA versus free cash flow margin
Aggregated practitioner reports, saas-marketing.net estimate
Burn multiple and the Craft Ventures bands
Burn multiple is net burn divided by net new ARR. Spend 4M of net cash in a quarter and add 2M of net new ARR, and your burn multiple is 2. It answers one question: how many dollars do you consume to add a dollar of recurring revenue.
David Sacks and Craft Ventures published the grading bands that everyone now uses.
| Burn multiple | Grade | What it usually means |
|---|---|---|
| Under 1 | Great | Efficient, often near default alive |
| 1 to 1.5 | Good | Healthy venture-backed growth |
| 1.5 to 2 | Suspect | Something in the model needs fixing |
| 2 to 3 | Bad | Growth is being purchased, not earned |
| Over 3 | Very bad | Serious questions about the motion |
What makes burn multiple better than Rule of 40 for operating decisions is that it is cash in and ARR out. There is no margin definition to argue about and very little to game with accounting choices. It is also brutally sensitive: one quarter with a weak net new ARR number and a full cost base will show up immediately.
Early stage companies should expect higher numbers. Below roughly 3M ARR, fixed costs dominate and a burn multiple of 2 is not alarming. What matters is the four-quarter trend. Flat or rising burn multiple across a year while ARR grows is the signal that the motion is not scaling.
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The table that matters: what each marketing decision does to each metric
This is the part most marketing leaders have never mapped. Different spend decisions hit the two metrics on different timelines and in different directions, and knowing which is which changes how you sequence a plan.
| Marketing decision | Effect on Rule of 40 | Effect on burn multiple | Lag before the upside lands |
|---|---|---|---|
| Paid acquisition ramp | Down now, up later if payback clears | Up now, down later | 1 to 2 quarters |
| Field events and conferences | Down now, uncertain later | Up now, uncertain later | 2 to 4 quarters |
| Annual prepay incentive | Neutral to slightly down | Improves immediately | Immediate cash effect |
| Marketing headcount added | Down for 3 to 4 quarters | Up for 3 to 4 quarters | 3 to 4 quarters |
| Content and organic program | Down slightly, up meaningfully later | Up slightly, down later | 3 to 6 quarters |
| Expansion and retention marketing | Up, often quickly | Improves, often quickly | 1 to 2 quarters |
| Discounting to close the quarter | Up this quarter, down next year | Improves this quarter only | Negative from quarter 3 |
Two rows deserve attention. The annual prepay incentive is the cheapest burn multiple improvement available to a marketing team: offering two months free for annual upfront payment pulls cash forward without changing the ARR number, so net burn falls while net new ARR holds. It does almost nothing for Rule of 40, because the revenue recognition is unchanged.
The discounting row is the one that quietly destroys companies. It flatters both metrics in the quarter it happens and damages next year’s NRR, which shows up as a worse burn multiple twelve months later when the renewal comes in at the discounted rate and expansion has to climb out of a hole.
The quarterly scoring trap
If your board scores Rule of 40 quarterly, every investment with a multi-quarter payback looks like a mistake in the quarter you make it. Pre-agree the lag in writing before you start the ramp, or you will be asked to stop it in month four, one quarter before it works.
Why the 2021 targets are gone
The growth-at-all-costs period rewarded one term of the Rule of 40 equation and ignored the other. A company could post minus 60 percent margin at 100 percent growth and be celebrated. That arithmetic still clears 40, which tells you something about the limits of the rule as a management tool.
Median private B2B SaaS growth now sits near 22 percent. Run that through the formula and the implication is stark: most companies now need roughly 18 percent margin to clear 40, and the majority of venture-backed SaaS companies do not have it. The realistic target for most private companies is a score in the 20s trending upward, not a score of 40.
This is why the efficiency conversation reached marketing at all. When growth alone could carry the score, marketing spend was rarely questioned. Now that margin has to do half the work, every line of marketing spend is a direct subtraction from the number the board scores.
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SaaS benchmark evaluation worksheet
Record the source, date, cohort and metric definition before comparing your numbers with a benchmark.
How to work out your own numbers this week
You need four inputs and they all exist in finance’s model already. Ask for them by name rather than asking for “the efficiency metrics”, which produces a deck instead of numbers.
Getting your company's real efficiency picture
- Get net new ARR by quarter for eight quarters
New plus expansion minus churn and contraction. You will know it is right when it reconciles to the ending ARR balance.
- Get net cash burn by quarter for the same period
Change in cash excluding financing. Not EBITDA, not operating loss. If finance offers EBITDA instead, ask again.
- Divide burn by net new ARR for each quarter
Plot the eight points. The trend line is the answer, not the latest point. Use the [burn multiple calculator](/calculators/burn-multiple/) if you want the bands drawn for you.
- Calculate Rule of 40 both ways
Once on EBITDA margin, once on free cash flow margin. Note the gap. The [Rule of 40 calculator](/calculators/rule-of-40/) does both side by side.
- Split the burn multiple by motion if you can
New logo acquisition versus expansion. Expansion almost always burns less per dollar, which is the argument for funding customer marketing.
- Write the one-page version and send it to your CFO
Confirmed when the CFO corrects one number and keeps the format. That is how you get invited to the budget conversation earlier next time.
The split in step five is the most useful thing on this list for a marketing leader. If expansion ARR burns at 0.4 and new logo ARR burns at 2.6, you have a quantified argument for moving budget toward retention and expansion marketing that does not rely on anyone believing your attribution model.
The honest limitations of both metrics
Neither metric handles seasonality well. A company with a heavy Q4 close will post a flattering Q4 burn multiple and an ugly Q1 one, and reading either in isolation produces bad decisions. Use trailing four quarters.
Burn multiple also punishes deliberate investment that has not landed yet, which means a company doing exactly the right thing in month two of a two-year platform bet looks inefficient. And Rule of 40 treats a 60 percent grower burning cash as identical to a 20 percent grower printing it, which no experienced investor actually believes. The rule is a screen, not a verdict.
There is a third problem specific to marketers. Both metrics are company-level, so neither tells you whether your program is working. Pair them with LTV to CAC ratio, SaaS magic number and the SaaS quick ratio, which decompose the same efficiency question into pieces a marketing team can actually act on.
What to do next
Calculate both numbers for your own company this week, both margin versions, eight quarters of burn multiple. If you cannot get the inputs, that itself is the finding and it is worth raising.
Then take the decision table above into your next budget conversation and frame one request in those terms. For the wider metric set, start at SaaS metrics and analytics. To see how listed companies report these, the public SaaS metrics teardown works through real filings. And if you are modelling a growth versus runway tradeoff, the runway and growth tradeoff calculator and the MRR growth calculator will let you test the shape before you commit the spend.
Editable CSV worksheet
SaaS Metrics and Analytics planning worksheet
A practical metrics planning worksheet: decisions, owners, evidence and next actions.
Frequently asked questions
What is the Rule of 40 formula?
Revenue growth rate percentage plus profit margin percentage. A company growing 30 percent with a 10 percent margin scores 40. A company growing 60 percent at minus 20 percent margin also scores 40. The rule says the two are equally healthy, which is its strength as a shorthand and its weakness as a management tool, because it treats very different businesses as identical.
Should Rule of 40 use EBITDA or free cash flow margin?
Free cash flow margin is the more honest input because it captures capitalised software development, deferred revenue timing and working capital. EBITDA flatters companies that capitalise engineering costs. The difference commonly runs 10 points or more, so always ask which margin a published Rule of 40 score used before comparing companies.
What is a good burn multiple for a SaaS company?
Craft Ventures, who popularised the metric, grade it as under 1 great, 1 to 1.5 good, 1.5 to 2 suspect, 2 to 3 bad and over 3 a serious problem. Early stage companies run higher because fixed costs dominate. The number to watch is the trend across four quarters rather than any single quarter, which can be distorted by one large deal.
How does marketing spend affect the Rule of 40?
Marketing spend reduces margin immediately and raises growth with a lag of one to four quarters depending on channel. That timing mismatch means a paid ramp lowers the Rule of 40 score in the quarter it starts and may raise it two quarters later. Boards that score the metric quarterly therefore penalise exactly the investments that improve it annually.
Which is better, Rule of 40 or burn multiple?
Burn multiple for operating decisions, Rule of 40 for valuation conversations. Burn multiple is cash in and ARR out, which is hard to manipulate with accounting choices. Rule of 40 is easier to communicate and is what public market comparables are quoted on. Most efficient companies track both and expect them to disagree at least once a year.
Why do marketers need to know these metrics?
Because budget decisions are now made with them. A marketing leader arguing for headcount in terms of leads and MQLs is speaking a language the CFO stopped using. The same request framed as its effect on burn multiple and CAC payback gets a different hearing, because it answers the question the board is actually scoring.
Can a company have a good Rule of 40 and a bad burn multiple?
Yes, and it happens often. A company with strong accounting margin but poor net new ARR conversion can clear 40 while burning cash inefficiently to add revenue. The reverse also occurs when a company with negative margin adds ARR very capital efficiently. When the two disagree, trust the burn multiple for operating decisions.
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We research, write and maintain every page on this site. The library explains marketing decisions through practical frameworks, explicit assumptions and references. Corrections can be requested through the contact page.
Published September 11, 2026. Last updated .