Annual recurring revenue per employee: What it is, why it’s important, and how to calculate it

Understanding the difference between ARR and ARR/FTE   

In order to grasp the significance of ARR/FTE, it's important to first understand each component. 

ARR is the predictable, recurring revenue generated from subscriptions or contracts over a year. For instance, if a customer signs a three-year contract worth $48,000, the ARR would be $16,000 per year. The predictability of recurring revenue allows SaaS companies to forecast, communicate, and plan better. 

Full-time equivalent (FTE), on the other hand, provides a standard unit of measurement that represents the total number of hours one full-time employee works for your company. 

To get the equivalent number of FTEs for part-time employees, you have to convert their hours based on how you define a full-time work week. 

For example, let’s say SaaS startup ABC has the following employee structure and defines “full time” as 40 hours per week:

• Three full-time developers, each working 40 hours per week
• Two part-time customer support representatives each working 30 hours per week
• One part-time content writer working 20 hours per week

To get the FTE for part-time employees, you would simply divide the hours they work each week by the number of hours in a full-time work week (40 hours per week in our example):

• Full-time developers: 3 x (40/40) = 3 FTE
• Part-time customer support: 2 x (30/40) = 1.5 FTE
• Part-time content writer: 1 x (20/40) = 0.5 FTE

Note that even though there are six people on the payroll, their workload is equivalent to five full-time employees.  

FTE is crucial for SaaS companies as it helps in managing resources, headcount planning, and evaluating team productivity across different departments or projects.

In this article, our focus is on ARR/FTE, which provides a nuanced and yet  straightforward understanding of how a SaaS company translates its most valuable resources – its people – into sustainable recurring revenue. 

The higher your ARR/FTE, the more effectively you are leveraging your human resources to drive revenue growth. 

Why is ARR/FTE important for SaaS businesses?

Any SaaS founder would agree that balancing growth and efficiency often feels like a tightrope walk. This is exactly where tracking ARR/FTE can give you a big advantage.  It offers key insights into your company's operational health and future prospects. 

SaaS CXOs use ARR/FTE to answer questions like, “Am I hiring faster than the company can generate topline results?” Or, in case of comparatively early-stage SaaS companies, leaders can gauge whether their growth trajectory has the potential to outpace costs over time (a critical factor for achieving profitability). 

ARR/FTE also supports several key business functions, such as:

• Efficiency assessment: By comparing ARR/FTE across different departments or time periods, SaaS companies can identify productivity hotspots or areas that need improvement. This granular view helps companies come up with targeted interventions to boost overall efficiency.
• Scalability evaluation: The hallmark of a successful SaaS business is growing revenue without proportionally expanding its workforce. Steadily increasing ARR/FTE is a positive indicator of scalability. 
• Strategic resource allocation: ARR/FTE can enable a data-driven approach to resource distribution by highlighting teams or departments that are more efficient in generating revenue. 
• Investor relations: A strong ARR/FTE demonstrates your ability to efficiently convert your human resources into revenue, which is a key consideration for your current and future investors.
• Competitive benchmarking: ARR/FTE allows companies to compare their performance against industry peers and competitors. With this benchmarking, you will get valuable context for setting internal targets and identifying areas for improvement.
• Decision support for tools: ARR/FTE insights guide investments in automation and AI technologies, leading to more efficient growth. 

Nuances to consider when interpreting ARR/FTE 

While ARR/FTE is a powerful indicator, it requires nuanced interpretation as its relevance can vary significantly due to various factors including company size, stage, and specific circumstances, such as a company’s country of operation.

Understanding these nuances helps leverage this metric more effectively.

1. The metric is more relevant at different stages in your business

While some recommend tracking ARR/FTE from as early as $2M ARR, its real significance often emerges around the $10M-$20M ARR mark. 

Prior to achieving the  $10M-$20M ARR mark, various factors like scale, go-to-market (GTM) strategy, and gross margins can impact your ARR/FTE ratio, making it less useful as an indicator of efficiency.

For example, early-stage startups often prioritize rapid growth over efficiency, which can lead to lower ARR/FTE ratios. This trade-off is a purely strategic choice but needs to be considered when interpreting your ARR/FTE ratio. Just as a note of caution, ARR/FTE is certainly not a meaningful exercise for pre-revenue companies or those yet to achieve product-market fit.

Scale matters

ARR/FTE tends to increase as companies grow. More “established” companies benefit from a cumulative ARR base built over time, as they reap rewards from customer retention and expansion. 

Thus, ARR/FTE should also be considered alongside bottom-line efficiency metrics to ensure a holistic view of financial health.

The market context matters, too

During uncertain economic times, investors tend to more closely scrutinize ARR/FTE, along with other revenue metrics like the Rule of 40, as these are seen as good indicators of productivity and balanced growth. 

In growth-focused markets, however, they might pay less attention to ARR/FTE in favor of pure growth metrics, such as monthly recurring revenue (MRR), customer lifetime value (LTV), and net revenue retention (NRR). 

What is a good revenue per employee ratio?

While research suggests that the overall median revenue per employee for private SaaS companies is around $112,500, this varies significantly by company size. 

For instance, companies with $1-3M ARR typically show a median of $80,000 ARR per employee, while larger companies tend to have higher ratios. 

Bootstrapped companies also have a higher ARR/FTE due to their need to be more capital efficient. For example, equity-backed companies with $1M to $3M in ARR have a median ARR per employee of $64,286. Meanwhile, bootstrapped companies of the same size show a median ARR/FTE of $104,186. 

The relative importance of benchmarks vs. ARR/FTE trends

While benchmarking is a powerful tool for planning, it’s prudent for SaaS companies to track their own ARR/FTE trends rather than constantly benchmarking with global industry peers/leaders. Your company's unique trajectory and business model should inform how you interpret and act on this metric.

This is because standard benchmarks often fail to account for factors such as geographical differences in employee costs or the use of consultants and offshore resources. 

For example, a company leveraging a region like India to capitalize on relative cost arbitrage might appear more efficient in ARR/FTE terms, but this may not reflect true operational efficiency.

If you want to benchmark your ARR/FTE results, it’s important to research and prioritize companies with similar go-to-market strategies, industries, and growth rates to benchmark your against to gain meaningful insights.

How to calculate revenue per FTE

Calculating ARR/FTE is quite straightforward. To calculate revenue per employee, you would use the formula below:

Here's a simple breakdown of the formula:

• Revenue: Total revenue is the sum of recurring revenue from subscriptions over a 12-month period (ARR). All one-time fees or non-recurring revenue should be excluded.
• FTE: For the same 12-month period, count all full-time employees as 1.0 FTE each. For part-time employees, calculate their FTE based on hours worked (as demonstrated in our earlier example). 
• Perform the calculation: Once you have both the figures, simply divide the revenue by the number of FTEs.

Regular recalculation (e.g., quarterly) of ARR/FTE can provide trend insights. Also, do remember to consider seasonal variations in staffing when interpreting results, if applicable for your business or industry.

Best practices for improving your SaaS company’s ARR per FTE

Improving ARR per FTE is crucial for SaaS companies aiming to scale efficiently and profitably. The following strategies can be useful in boosting productivity, optimizing resources, and driving sustainable growth. 

Optimize your go-to-market strategy

Analyze the incremental returns of sales and marketing investments across different customer segments, geographies, and deal sizes. 

Consider implementing a self-serve model for smaller clients while focusing your sales team on high-value enterprise segments (assuming that your product caters to both sets of customers). Continuously refining your approach based on data-driven insights can help you maximize productivity.

Review your R&D and product approach

Instead of your R&D focusing on an ever-increasing backlog of requests, you could instead prioritize features and products that have a high probability of positively impacting profitability. 

The aim here would be to integrate more functionalities into the product experience, embracing a product-led growth strategy that reduces reliance on human intervention and improves scalability. 

Obviously, this decision has to be taken after carefully considering your target audience, sector and market expectations. 

Optimize team structure and workforce management

SaaS businesses can enhance their organizational efficiency by closely looking into the span of control of its team leaders and managers. It is crucial to find an ideal manager-to-employee ratio that promotes effective leadership without over-management. 

The Rule of 7 suggests that seven reports for every one manager is ideal, but it’s not a strict rule. Depending on factors such as number of employees, sector and department, that number might vary for your business. 

It is also important for the HR department and the management to address absenteeism through wellness programs and flexible work arrangements to maximize productive hours. 

Explore AI and automation to find new efficiencies

Identifying ways to incorporate AI-powered solutions into different areas of your operation, such as marketing, sales, and customer support, can significantly enhance efficiency. 

For example, revenue planning software can help reduce the need for human intervention in “routine” processes, allowing your team to focus on high-value activities that need their “creativity” to drive ARR growth.

Leverage customer feedback

While striving for higher ARR/FTE is a continuous process, it is crucial for companies to ensure that this continuous optimization does not curb growth initiatives or impact customer satisfaction. 

Customers are often one of the best sources for understanding how to make your product better and easier to use. Incorporating their feedback into your ongoing product development processes can ultimately lead to efficiency improvements in terms of fewer resources needed for customer support. 

Of course, this requires collaboration between CS and product teams. It’s worth mentioning here that by encouraging collaboration between product, sales, and marketing teams you can develop integrated strategies that leverage each team's strengths while minimizing redundancies. 

Tracking your ARR/FTE is the key to unlocking SaaS efficiency and growth

ARR/FTE is easily the most trustworthy metric to get insights into operational efficiency and scalability. 

While the calculation seems rather straightforward, it requires tracking and pulling in data from various systems, including CRM, ERP, and HRIS platforms. This complexity, coupled with the need to track multiple SaaS metrics and share them with investors, underscores the importance of specialized technology solutions.

As a strategic, third-generation financial planning and analysis software, Drivetrain addresses these challenges by seamlessly integrating data from multiple sources, and providing real-time monitoring of key metrics and KPIs through customizable dashboards.

Moreover, Drivetrain enables easy trend analysis and forecasting, empowering SaaS companies to make data-driven decisions that foster growth and profitability.

By leveraging Drivetrain's capabilities, you can strategically allocate resources, optimize GTM strategies, and balance efficiency with sustainable growth.