Your guide to ARR per employee

A primer and new benchmarks on the hot new SaaS metric

👋 Hi, it’s Kyle and I’m back with a 🔥 edition of Growth Unhinged, my newsletter that explores the unexpected behind the fastest-growing startups. Subscribe to join 44,884 readers who get Growth Unhinged delivered to their inbox every Wednesday morning.

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SaaS seems to love complicated metrics. I’d be lying if I said I didn’t love a few of them, too.

An increasingly important metric is shockingly simple: annual recurring revenue (ARR) per full-time employee (FTE). It’s a metric you can’t hide from. There’s no complicated math or financial engineering to do. You don’t need to be a CFO to calculate it.

I’ll unpack what “good” ARR per FTE looks like, how expectations are changing, ways to improve this metric, and common pitfalls to avoid. Let’s dive in.

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What “good” looks like

Knowing what metric you should use is just half the battle. You also need to know what “good” looks like. 

For this, we can turn to the 2023 SaaS benchmarks report, which collected data from 700+ private SaaS companies.

Here’s how to tell whether you’re on the right track:

📈 $1-$5 million ARR: Good: $90k, Great: $150k+

📈 $5-$20 million ARR: Good: $150k, Great: $250k+

📈 $20-$50 million ARR: Good: $200k, Great: $275k+

📈 More than $50 million ARR: Good: $250k, Great: $300k+

Of course, there are notable outliers that stretch what’s possible as SaaS companies get big. Public SaaS companies see a median of $283k ARR per FTE and a top quartile of $369k ARR per FTE based on data powered by the team at Virtua Research. A few examples:

• Box: $420k

• Splunk: $455k

• Adobe: $617k

• Twilio: $771k

• Dropbox: $799k

Take this data with a (big) grain of salt. What “good” means varies a ton based on your scale, how much you invest in future growth opportunities, where you hire employees and more. More on that later.

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The bar is getting higher

There’s a much higher bar for efficiency than before; median ARR per FTE jumped year-on-year. While we’re not quite in the one-person unicorn utopia envisioned by Sam Altman, SaaS companies really are doing more with less. 

ARR per FTE has increased across the board — especially among companies between $5-50M ARR. For many businesses, this looked like the delicate balancing act of reducing headcount from the 2021-2022 peaks while continuing to scale revenue.

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Don’t optimize for ARR per FTE too early

Venture backed businesses are usually investing today in growth that they expect to materialize in the future. New sales reps, for example, may need six months of ramp before they’re fully productive. Product managers and engineers build new products that won’t be monetized for some time. 

If you over-orient toward ARR per FTE too early in your company building, you’ll risk missing out on key investments that create future competitive advantage and the foundation for continued growth. 

Indeed, the ARR per FTE benchmarks look quite different for high growth venture-backed businesses than the broader SaaS ecosystem. The chart below shows the 25th-75th percentile range for these high growth businesses (in black) plotted against the broader industry benchmarks. Median ARR per FTE for high growth VC-backed companies tends to be $40k to $80k less than counterparts.

Plan for this metric to be quite low (<$100k) when you’re investing in growth. But be mindful of what this number will look like at scale as your new hires are ramped. The general rule of thumb is to have a path to $200k+ ARR per FTE at maturity. 

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Compare yourself with the right peer set

As much as I love ARR per FTE due to its simplicity, the reality is that not every employee or company is the same.

• A business like Monday.com (gross margin of “high 80s”) doesn’t need to have the same ARR per FTE as Twilio (gross margin of ~50%) in order to reach profitability.

• The same goes for a business that hires in a low cost geography like India relative to a location like San Francisco.

• Or a business that runs their operations with in-house personnel compared to one that outsources with agencies and consultants. 

ARR per compensation $ is a more precise way to measure productivity improvements for your specific business model.

Unfortunately, that data isn’t usually publicly available. When you’re comparing ARR per FTE against other businesses, make sure to adjust based on the following factors:

• Scale (higher scale → expect higher ARR per FTE)

• Growth rate (higher growth → expect lower ARR per FTE)

• Gross margin (higher GM% → expect lower ARR per FTE)

• Geography (more FTEs in low-cost geos → expect lower ARR per FTE)

• Vendor spend (more vendors → expect higher ARR per FTE)

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Increase ARR per FTE (the right way)

There are two functions that collectively account for roughly two-thirds of employees in the average SaaS business (see the image below):

• R&D (~35-40% of employees)

• Go-to-market (~25% of employees)

We’ve become accustomed to scrutinizing go-to-market teams based on their revenue productivity, but have devoted significantly less attention to R&D productivity. That’s been changing as leaders hold R&D performance to more objective standards and contemplate shifting hiring to lower cost geographies. 

Here are three areas to investigate on your path to improving ARR per FTE:

1) AI and automation to improve productivity.

In theory, AI and automation (along with PLG) should continue to drive this number up as work that would normally be done by people is now built into product experiences instead. This should result in:

• Fewer marketers needed per AE (see tools like Copy AI)

• Fewer SDRs needed per AE (see tools that automate the SDR or replace SDRs with AI)

• Fewer Solution Consultants needed per AE (see tools like Vivun)

• Fewer CSMs per paying customer (see methodologies like scaled CX)

2) Measuring the incremental returns generated by sales & marketing investments.

Does adding a sales rep actually improve conversion or deal size? In many cases, yes!

But it might not for the SMB or non-ICP customer.

Our analysis needs to drill down into the go-to-market motion to understand productivity by customer segment, geography, deal size and other factors.

You might find that self-service is a more efficient way to sell into smaller customers (see Amplitude) or that the sales team should move upmarket for better productivity.

3) Scrutinizing R&D performance and efficiency.

Companies often treat R&D as a fixed resource pool with a nearly limitless backlog of priorities. There’s always more that we want to do than there are resources available… right?

What if we flipped that mentality on its head? That would mean only saying yes to new products and features where we had conviction that they would exceed our hurdle rate in terms of business outcomes — with the ultimate outcome being profitability.

This mindset shift would apply to product growth teams as well. With this framing, perhaps we would see more growth folks shift their focus from projects like self-service onboarding towards ones with the potential for even bigger revenue impact like sales productivity (as Ramp does)?

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More resources

• Battery’s State of the Cloud report from late last year unpacked how AI and automation can drive ~30% sales and marketing headcount savings. It’s worth a read.

• SaaS CFO

  CJ Gustafson
  calls ARR per FTE the GOAT of SaaS metrics and nerds out on the public company data.

• I make a case for a next-era SaaS metrics playbook, which includes ARR per FTE along with other emerging SaaS metrics.