If you want to break even, go APE
First in our series of Quarterly Cloud Reports, we explained how the market has shifted towards assessing the profitability of cloud companies, even at the expense of growth (this Twitter thread digs deeper into that data).
There’s no shortage of efficiency metrics that cloud executives can track to get a better perspective on their overall economy. Sales and marketing effectiveness metrics such as LTV-to-CAC, CAC ROI, and Magic Number have long been mainstays of card games and fundraising materials. As the market has transformed, multiple burn (net burn / net new ARR) has become a popular and all-encompassing way to look at burn versus ARR growth.
The difficulty with these efficiency measures, however, is that they are not tangible in an actionable way for your employees. They look more like financial metrics than operational metrics, and it’s difficult for employees to execute on these concepts.
Product enhancements can absolutely have a big impact on sales effectiveness, but those enhancements are a byproduct of product and engineering work rather than something that may seem like a priority. Burn multiple emphasizes having “less bad burn” rather than indicating which actions will actually drive profitability.
It is still imperative to be the winner in your market.
Our advice to cloud CEOs? At your next town hall meeting, or during your next one-on-one meetings with functional leaders, align your team around ARR per employee – a metric we call APE.
APE is an extremely simple metric that we believe could serve as your North Star when sailing in these unstable times.
Why should APE be the North Star of efficiency?
The cost structure of cloud companies is primarily determined by people. There are other costs to consider, such as cloud expenses, real estate, and expenses for other SaaS applications you need to run your business. But about 70% of your costs are probably going to be directly related to your employees. If you want your business to become more efficient, ultimately your employee base is the place to start.
A key point here: Optimizing your employee base should ideally be through smart and measured hiring, not reactive downsizing. Achieving the first will help your business avoid the second. When trying to instill this hiring discipline in your organization, the APE can be a powerful tool.
As a manager or leader, every decision you make has an impact on APE. Every new initiative or project that needs to be staffed has an impact on the APE. Each replaced role has an impact on the APE. If you can automate a task with software or distribute new projects among team members, your APE improves. Prior to any personnel related move, the APE should be discussed.
A few key points to remember
Unlike the magic number or the “rule of 40”, there is no APE number that we recommend. The APE of a company with all employees located in the Bay Area, for example, must be much higher to achieve profitability than a company that has employees in lower cost geographies.
But we can offer a few data points to guide you, all derived from Capital IQ data and battery research over many years of scaling software companies.