If you want to break even, go APE
In the first In our Cloud Quarterly Report series, we’ve talked about how the market has shifted to underestimating the profitability of cloud companies, even with growth.This thread on Twitter goes deeper into that data).
There is no shortage of performance metrics that cloud executives track to get a better view of their overall economics. Sales and marketing efficiency metrics like LTV-to-CAC, CAC return, and the magic number are staples in boardroom and fundraising materials. As the market turns, multiple burn (net burn/net new ARR) has emerged as a popular and comprehensive way of looking at both burn and ARR growth.
The problem with these performance metrics is that they are not realistic enough to apply to your employees. They feel more like financial metrics than practical ones, and it’s hard for employees to execute against these concepts.
Improvements to a product can have a big impact on sales efficiency, but those improvements are the product of product and engineering rather than something that might feel like a high-tech brain. Too much burnout focuses on “bad burnout” rather than identifying which activities increase profitability.
It is still very important to be a winner in your market.
Our advice to cloud CEOs? At your next cross-functional meeting or your next one-on-one with functional leaders, align your team around ARR per employee – a measure we call APE.
It’s a very simple measure that we think APE can serve as your North Star as you navigate these changing times.
Why should APE be a North Star efficiency?
The cost structure of cloud companies is primarily driven by people. There are other costs to keep in mind such as cloud costs, real estate and other SaaS applications to run your business. But 70% of your costs can be directly related to your employees. If you want your business to be more efficient, at the end of the day, your employee base is where it starts.
A key point here: growing the employee base should be through smart, measured hiring, not reactive downsizing. Achieving the former will help your business avoid the latter. As you try to instill this hiring discipline in your organization, APE can be a powerful tool.
As a manager or executive, every decision you make affects APE. Every new initiative or project impacts APE. Each backfilled role affects the APE. If you can automate a task with software or distribute new projects among team members, your APE will improve. Before any personnel action is taken, the APE must be discussed.
Some key parameters to remember
Unlike the magic number or the “Rule of 40”, there is no single APE number that we recommend. A company with all employees working together in the Bay Area, for example, must have a higher APE than a company in a low-cost geography to achieve profitability.
But we can provide you with some data points to help guide you, all from Capital IQ’s data and battery of research spanning several years of growing software businesses.