ARR per employee is the North Star efficiency metric you’ve been looking for

In the first installment of our Cloud Quarterly report series, we spoke about how the market has shifted to valuing cloud companies’ profitability, even when it comes at the expense of growth (this thread on Twitter goes in-depth into that data).

There is no shortage of efficiency metrics that cloud executives can track to gain a better perspective of their overall economics. Sales and marketing efficiency metrics such as LTV-to-CAC, CAC payback and the magic number have long been mainstays in board decks and fundraising materials. As the market has turned, burn multiple (net burn / net new ARR) has emerged as a popular, all-encompassing way of looking at burn versus ARR growth.

The difficulty with these efficiency metrics, though, is that they aren’t tangible in a way that is actionable for your employees. They feel more like financial metrics than operational ones, and it is difficult for employees to execute against these concepts.

Improvements in product can absolutely have a large impact on sales efficiency, but those improvements are a derivative of product and engineering work rather than something that can feel top-of-mind. Burn multiple puts the emphasis on having “less bad burn” rather than indicating which actions will actually drive profitability.

Our advice for cloud CEOs? At your next all-hands meeting, or during your next one-on-ones with functional leaders, align your team around ARR per employee — a metric we are calling APE.

APE is an extremely simple metric we think could serve as your North Star as you navigate these volatile times.

Why should APE be the efficiency North Star?

The cost structure of cloud companies is driven primarily by people. There are other costs to be mindful of, such as cloud expenses, real estate and spending on other SaaS applications you need to run your business. But around 70% of your costs are likely going to relate directly to your employees. If you want your business to become more efficient, at the end of the day, your employee base is the place to start.

One key point here: Optimizing your employee base should ideally come through smart, measured hiring, not a reactive reduction in force. Achieving the former will help your business avoid the latter. When attempting to instill this hiring discipline across your organization, APE can be a powerful tool.

As a manager or executive, every decision you make has an impact on APE. Every new initiative or project that needs to be staffed impacts APE. Every backfilled role impacts APE. If you can automate a task with software, or spread new projects between team members, your APE improves. Before any personnel-related move is made, APE should be discussed.

Some key benchmarks to keep in mind

Unlike the magic number or the “Rule of 40,” there is no one APE number we recommend. The APE of a company with all employees co-located in the Bay Area, for example, needs to be much higher to reach profitability than a company that has employees in lower-cost geographies.

But we can offer some data points to help guide you, all derived from Capital IQ data and Battery research through many years scaling software businesses.

Image Credits: Battery Ventures