What is the rule of 23 in business?

Understanding the Rule of 23 in Business

While tech startups often rely on the high-flying Rule of 40 to judge their performance, traditional and service-based companies need a framework grounded in reality. That is where the Rule of 23 comes into play. Designed for businesses operating with higher overhead, physical assets, or labor costs, this benchmark provides a practical gauge for evaluating overall financial health.

At its core, the Rule of 23 combines two essential metrics: your annual revenue growth rate percentage and your pre-tax profit margin percentage. Rather than chasing unsustainable growth at all costs, this rule encourages business owners to maintain a realistic, steady balance between expanding market share and generating actual profit.

To hit the benchmark, the sum of these two percentages should equal at least 23%. Consider a company growing 13% year-over-year while maintaining a 10% pre-tax margin. That business scores a combined 23%, signaling a healthy balance between expansion and profitability. On the flip side, if a company grows by 8% with a 7% margin, its score drops to 15%—a strong sign that it needs to re-evaluate pricing, operational efficiency, or customer acquisition costs.

Ultimately, the Rule of 23 offers a simple snapshot of sustainability. It reminds leaders that healthy business growth shouldn't compromise profitability, ensuring long-term stability even when market conditions shift.