Overview

Revenue per employee is a popular benchmarking metric that is used by businesses to evaluate employee productivity. This metric is calculated by dividing a company's annual revenue by its total number of employees in a given period.

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In this blog we will explain:

1. Revenue per employee formula
2. Use of the revenue per employee ratio
3. Why revenue per employee is important for businesses
4. What a good revenue per employee ratio looks like
5. Revenue per employee benchmark by industry
6. How to to increase revenue per employee

Revenue per employee formula

The inputs for this metric are quite straightforward. To calculate revenue per employee, you need to know the total revenue of the company, as well as the number of employees.

This information can typically be obtained from the company's annual reports, financial statements, or website. Note, it is important that these figures are for the same period and that the number of employees include everyone, not just full time employees.

When you have sourced these two figures, then you just need to divide the annual revenue by the total number of employees.

What is the use of revenue per employee ratio?

Revenue per employee measures how much revenue a company generates per employee on average. This metric is useful for assessing the productivity of a company's workforce and can provide insights into how effectively a company is using its human resources.

It is one of a few key performance indicators used by management teams to get a sense of the value each employee contributes to the business. Now let's dig a bit deeper to understand why revenue per employee is important for businesses.

Why revenue per employee is important for businesses

There are several reasons why companies use the revenue per employee metric. One of the main reasons is that it provides an easy way to compare the financial performance of a company with similar companies.

Another reason why the revenue per employee metric is useful is that it can be used to drive new initiatives for growth. By focusing on revenue per employee, companies can increase their total revenue without necessarily having to hire more employees.

Fundamentally this metric allows companies to benchmark themselves against their competitors. Businesses can go even further and assess revenue per employee in a specific function or location. This next level down can help to identify areas where they may need to improve their operations.

This can be particularly important for companies that are operating in industries with high labor costs or limited labor pools. So with these things in mind, what is a good revenue per employee ratio?

What is a good revenue per employee ratio?

A good revenue per employee ratio can vary significantly depending on factors such as the industry, company size, location, and business model.

Industries with high capital investments or more reliance on technology, such as manufacturing or software companies, tend to have higher revenue per employee ratios. On the other hand, labor intensive industries like retail or hospitality may have lower ratios due to the need for a larger workforce to support operations.

A high level benchmark for good revenue per employee levels is between $200,000 and $500,000. However, it's crucial to keep in mind that this is a general range and what is considered "good" can vary based on regional and industry specific factors.

To see what I mean check out the next section.

Revenue per employee benchmark by industry

Revenue per employee is particularly useful for comparing companies in the same industry. This is because different industries have varying levels of labor intensity, and comparing revenue per employee across industries can be misleading.

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For example, a manufacturing company may have a lower revenue per employee than a software company, but this does not necessarily mean that the manufacturing company is less efficient or effective. Check out the average revenue per employee by industry below based on 2022 CompanySights data.

Now that you are equipped with the benchmarks, it is time to consider some of the ways to improve the amount of revenue that an employee generates.

10 ways to increase revenue per employee

There are many ways to increase revenue per employee. Fundamentally it comes down to either generating more revenue with the same number of employees, or reducing the average number of employees while maintaining the same amount of revenue generated.

Let's look at five of the most common ways to improve revenue with the same labor force:

1. Training and Development

Invest in training and development programs to enhance the skills of existing staff. Talented employees are often more productive, provide better customer service, and contribute to innovative solutions that drive increased sales and revenue.‍

2. Automation and Technology‍

Using technology to automate certain workflows can both improve productivity and reduce operational costs. With the automation of repetitive processes, employees can effectively do more in that same amount of time and focus on more strategic tasks, leading to higher revenue generation.

3. Incentives and Recognition

Design incentive programs that reward employees for beating revenue targets and increasing profit margins. Recognizing and rewarding top performers can boost motivation and encourage others to excel, ultimately leading to increased revenue generation.

4. Customer Centric Approach

Focusing on customer satisfaction and building strong relationships with clients can lead to repeat business and positive word-of-mouth referrals. Satisfied customers are more likely to make repeat purchases and become brand advocates, increasing revenue over time.

5. Product and Service Diversification

Diversification can be either geographical (e.g. doing the same thing in new markets) or adding new products or services to an existing marketplace. Assess market demands and identify opportunities to expand into complementary or new markets to generate additional streams of revenue.

This is often quite hard to achieve without additional human resources, so the key thing is constant prioritization. Focus on the initiatives that will most likely drive increased revenues.

Now that we have a good understanding of how to improve revenue without the need for new employees, let's look at five ways that we can maintain revenue with fewer employees:

6. Process Automation

This is similar to item #2 where management look to streamline processes using technology wherever possible to reduce the need for manual labor. By supplementing human capital with technology, the remaining staff can handle more work, which will increase the revenue per employee.

7. Outsourcing and Freelancers

Consider outsourcing certain tasks or projects to external vendors or hiring freelancers, especially in areas where there is low productivity. This approach allows the company to access specialized skills without the overhead costs of full-time employees. It also provides greater flexibility in adjusting workforce size as needed.

8. Cross Training Employees

Similar to item #1 training your workforce to have multiple skill sets and be adaptable can drive up the average value of an employee. This flexibility ensures that even with a reduced headcount, various functions can still be carried out by the same employees, thus maintaining productivity and revenue levels.

9. Performance Based Evaluation and Incentives

Similar to item #3, management can implement a performance based evaluation system that rewards employees for their productivity and contributions. Offer incentives and bonuses tied to individual and team performance, motivating employees to excel and maintain revenue levels despite the reduced headcount.

10. Focus on High Value Activities

Identify the most profitable and revenue generating activities within the company and concentrate resources in these areas. By prioritizing high value activities and allocating resources accordingly, the company can sustain revenue levels with a smaller workforce.

This list of 10 ways to increase the company's total revenue and reduce the size of the workforce is just the tip of the iceberg. Initiatives are usually business specific, depending on the company's net income, employee turnover, and future growth opportunities.

Conclusion

Revenue per employee is common metric used to evaluate organizational performance in business. It is a relatively straightforward formula, where you first need to calculate revenue then divide it by the total number of employees (a.k.a. human capital).

The average amount of revenue per employee in a company is approximately between $200,000 and $500,000. However this can vary significantly by industry (e.g. technology companies vs businesses in the energy sector).

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Now that you are equipped with the right benchmarks, you can easily identify areas to improve efficiency in any business. Initiatives can include but are not limited to increased process automation, further training and development, and product or service diversification.

Generally speaking, the success of these strategies depends on careful planning, execution, and ongoing monitoring. It's essential to align these efforts with the company's overall objectives and ensure that employees are engaged and equipped to contribute to the business's growth.