SaaS Efficiency Benchmark: Revenue per Employee Progression

Revenue per employee is one of the most telling efficiency metrics for SaaS businesses. Examining this metric as the company grows and scales over a series of years can reveal quite a bit about the different dynamics at work:

• How does revenue growth compare to team size growth?
• Are there any economies of scale and does the company manage to take advantage of them?
• Is the company effective with upselling (one of the best ways to increase revenues while containing costs)?

Tom Tunguz, based on a sample of “category defining” publicly traded companies, writes:

“…Despite the massive growth of these organizations, the best companies are able to maintain or even accelerate their revenue per employee. In fact, increases in revenue per employee as a company scales is an incredibly positive sign of the health of the business. It indicates that the company is achieving economies of scale.”

For publicly traded SaaS companies in particular, he has determined that “the typical average revenue per employee is about $190K to $210K per year” (source).

Now that we have a picture from the mountaintop, let’s examine how SaaS companies climb up there.

Methodology and Source for Private SaaS

Revenue/Employee progression metrics for private companies are hard to find, so, instead, I will look at Revenue/Employee by company age. Since the sample used is big enough, the results should approximate the Revenue/Employee progression for the average SaaS business.

The sample contains 214 private B2B SaaS companies who chose to share their team size and revenue in the GetLatka.com database. The data was gathered by Nathan Latka, directly from 1 on 1 interviews he does with CEO’s on his podcast, The Top Entrepreneurs.

Results

In the chart above, we see that through years 1 to 7 median Revenue per Employee increases linearly (R squared equals 0.90), at a $21K/year rate or by 26% YoY on average. Upper/Lower quartiles and average values follow almost the same trend.

Does your SaaS company beat this trajectory?

Companies at the age of 7 years and above remain mostly at the same levels of Revenue/Employee. Notice that in this span the upper quartiles cross the $200K mark consistently (only exception is year 8), which indicates that some companies in the sample have reached impressive efficiency.

To put the above results into perspective, take a look at the Team Size and MRR by Company Age charts, below.

So, there you have it. The top SaaS companies not only scale up their teams and revenues rapidly, but at the same time manage to increase their Revenue per Employee rates.

Notes and Takeaways

Sample size is 214 companies; not large enough to claim that the results come with any statistical significance, but enough to get a good sense of the metric and its progression over time.

Annual revenues were calculated by assuming constant MRR values and projecting them over a 12-month period.

In this sample there are 10 companies that do $400K or more in Revenue/Employee, raising the average values way up.

Revenue/Employee is a synthetic metric. In this sample, Revenue has above average correlation with team size (R=0.74), while Revenue/Employee has average correlation with MRR (R=0.53) and almost nonexistent with Team Size (R=0.06).

This indicates that high efficiency is more likely at a higher scale in terms of revenue, but can be achieved at any scale, regardless of team size.

An increasing, better yet, accelerating Revenue/Employee rate over a series of years is by far a more important indicator of success at scale than a good Revenue/Employee value at a single point in time.

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This is part of a series on B2B SaaS. Check out the first part here, where I go in depth with SMB vs Enterprise/Mid-Market and Funded vs Bootstrapped, focusing on MRR, Team Size, Revenue/Employee, ARPU and Customer Count.

You are more than welcome to leave your feedback and thoughts or suggest topics for the posts to come. Find me on LinkedIn.

Originally published at getlatka.com.