447. Magic Number 🧜
A new North Star for companies of all shapes and sizes
Hellooo 👋 So happy to have you here. I’m Kevan. I have spent 15+ years as a head of marketing for some cool tech startups. Now I’m co-founding a brand storytelling business called Bonfire. We do coaching, advisory, and content, and we’d love to hear from you, anytime. Come say hello.
The new magic number
When I worked at Buffer, we did things our own way, including bizarre things like choosing our own salaries (a short-lived experiment) and savvy things like working remotely before it was cool and opening up our business metrics for anyone to see.
Metrics in particular were a fun playground. We were creative with metrics both for the marketing audience we served but also for us as a business.
And one of my favorite business metrics was average revenue per employee. The formula went like this:
ARR divided by # of full-time employees = Avg revenue per employee
We tried to maintain ~$200,000 per employee. So if there were 100 of us, then we wanted to be doing $20 million in ARR.
Of course, no other startup company in 2018 really cared about this number. Just us! Why care about this number when there is oodles of VC money sitting around for the taking? 🤑
Well, as life has gone on and those oodles of VC money have become traces of VC money, startups are now more open to efficiency metrics like this, especially ones that help keep headcount at a reasonable size, relative to revenue. The team at OpenView Ventures came out with their 2023 SaaS benchmarks this month, and lo and behold, look at the metric that made the cut this time! ARR per FTE!
I highly recommend Kyle Poyar’s newsletter about all these new SaaS benchmarks. Here’s what he had to say about ARR vs. FTE:
If you’re looking to emulate public SaaS companies, aim for $250k+ ARR per FTE with ideally a path for $300k+.
As much as I love ARR per FTE due to its simplicity, the reality is that not every FTE is the same. Global companies hire people across regions, distorting the FTE metric. ARR per compensation $ is a more precise way to measure productivity improvements.
Thinking back through my marketing career, this number has been a pretty solid indicator of how healthy a company was. I’ve been at places where ARR per FTE was above $200,000, and I’ve been at places where it was as low as $15,000 (not good!).
Now that I’m on the other side of the business, a co-founder of my own thing, I’m able to see the value in an efficiency number like this. And given my adversity to risk, I wouldn’t mind a revenue-per-employee number closer to $1,000,000!
For a long time, startups have looked to the “magic number” for their business health. This magic number works like this:
this quarter’s ARR minus last quarter’s ARR, divided by last quarter’s CAC
I have never used this magic number at any company I’ve been at. But I have used the revenue per employee number. Maybe it’s time for a new SaaS magic number?
There’s an article in a recent Wired magazine called “Resilience is the Missing Metric,” written by startup founder Paul Ford. In it, Paul basically says how vacuous all the growth metrics are, and he claims it’s time to measure something more important, like resilience. He also ends up realizing that you can’t really measure resilience (oops).
But I’d like to think that revenue-per-employee might be pretty close.
And pretty “magical.”
(Anything that keeps startups from over-hiring seems like magic in this day and age!)
About this newsletter …
Hi, I’m Kevan, a marketing exec based in Boise, Idaho, who specializes in startup marketing and brand-building. I previously built brands at Oyster, Buffer, and Vox. Now I am cofounder at Bonfire, a brand storytelling company.
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