73% of Companies Aren’t Measuring the KPI That Matters Most

by Jordan Cohen

What is the most important KPI that you probably aren’t paying attention to?

The answer is RPE, or revenue per employee.  

RPE is measured by how much revenue a company generates divided by total headcount. The higher the RPE, the more efficient and profitable the business.

The largest and most successful tech companies on the planet boast remarkable RPE: from the high six figures for companies like Microsoft and eBay, to $2 million+ for the largest company in the world, Apple. 

In the current environment, with the tech industry’s newfound appreciation for efficiency and profitability, one might think that RPE would be a top KPI if not every company’s north star. But in a straw poll that I recently conducted only 27% said that their company uses RPE as a KPI, and nearly a third never even heard of it. 

Amid today’s “Great Techcession” this is a mistake that must be rectified.

The Old Way of Doing Things is Over

The problem for most companies – especially SaaS tech – starts with a myopic focus on topline revenue and “growth at all costs” strategy.

The KPIs that support just R (revenue) are new annual recurring revenue (ARR) for sales, and marketing sourced pipeline (MQLs and SQLs) for marketing.

To achieve the ARR target, the CRO looks at the average closed-won rate (based on the number of opportunities each salesperson works) and annual contract value (ACV), multiplies the two, and then figures out how many salespeople they need to get there.

“If we have X number of reps on the team this year, who receive Y number of opportunities, we will hit our number!”

The consequence of this approach is that the CMO focuses entirely on generating pipeline and nothing else. They calculate how many raw leads convert into qualified leads (MQLs), and then how many MQLs convert into sales opportunities (SQLs) and set targets for those KPIs accordingly.

“If marketing generates X number of raw leads, Y number of qualified leads, and Z number of opportunities, the sales team will hit its number!” 

If only things could be so easy, right?

This is when things start to go downhill, fast.

Doing simple back of the envelope math, the CMO realizes that they’ll need about a billion raw leads for sales to hit its number. 

The cost of acquiring a billion new leads is a thousand times larger than the marketing budget, so it will be impossible to hit marketing’s KPIs, and sales will likewise fail.

This is when the CMO and CRO come together* to explain to the CEO and Board that they can’t possibly hit the R number – and sound like whiney “can’t do’s” in the process— or pretend that it’s going to work out while looking for new jobs before they get fired.

*Alternatively, they will just point fingers at each other for coming up short, and both still end up getting fired or quitting before they do.

Things don’t have to be this way. We have got to stop repeating the same mistakes.

Focus on The Metrics That Matter

The way to fix the problem takes us back the thesis of this article, which is that companies should make RPE their north star, not just R without the PE attached to it.

With RPE as the north star, the CRO and CMO align to improve 3 much more valuable and strategic KPIs:

·      ACV – average contract value.

·      Closed-Won percentage.

·      Velocity – making deal cycles shorter and wins faster.

When these metrics improve, salesperson productivity goes up, and RPE goes through the roof.

And when the same salespeople (and same number of salespeople) start closing more deals, faster, and at higher average deal sizes, it can be for one of a few reasons:

1)    They woke up one day and became a bunch of Rambos.

2)    They started taking courses that turned them into better sellers.

3)    They are reaping the benefits of a marketing program that’s making their jobs a heck of a lot easier.

Which of these is the likeliest cause? Marketing, of course. And there has never been a better moment for CMOs to showcase marketing as a strategic driver of the business – not just a leads factory – than now. 

Most businesses can’t figure out how to scale revenue without adding an enormous amount of people to their teams. Those are the same businesses who are firing a lot of people right now. 

On the other hand, businesses who are focused on RPE and the metrics that really matter are already emerging as winners during this downturn.

Jordan Cohen is the CEO & Founder of The Fox Hill Group – Consulting Chief Marketing Officer – Startup Advisor – Commentator in NY Times, Wall Street Journal, CNBC

Originally published on Linked In, March 2023:  https://www.linkedin.com/pulse/73-companies-arent-measuring-kpi-matters-most-jordan-cohen/?trackingId=0ybE1xXGQiycfaJjymGT%2FQ%3D%3D

The RPE chart included in the blog is originally from statista.com: https://www.statista.com/statistics/217489/revenue-per-employee-of-selected-tech-companies/