D-POPS GROUP is a community of enterprises that combine “real business, technology, and group synergy” in their operations, aiming to realize a Venture Ecosystem that remains essential to society even 100 years from now.
This article will explain revenue per employee, a metric for measuring productivity and efficiency that is crucial for company management.
“Revenue per employee” varies significantly depending on the type of business. It tends to be lower in labor-intensive businesses like retail stores, restaurants, or dispatch businesses (like SES/general staffing), and higher in capital-intensive businesses (which invest heavily in facilities, etc.) or information-intensive businesses (which attract high-level skills and knowledge). Because cross-industry comparisons can easily lead to the conclusion that the differences are simply due to the business type, we will focus here on comparing businesses within the same industry. Furthermore, since we put the retail industry in the spotlight for our previous article on “Inventory Turnover”, we will do so again to maintain consistency in the discussion.
1. The Key Differentiator for Improving P&L
In our previous article, we used inventory turnover as an example of a crucial management point for the retail industry. Inventory turnover impacts the cash flow (CF) and balance sheet (BS), but revenue per employee is a metric that ultimately affects the operating profit and thus the profit and loss (P&L) statement. While many P&L indicators exist, such as sales, profit margin, number of units sold, and selling price, we will explain why revenue per employee is so important.
2. Calculating Revenue Per Employee
First, revenue per employee is a metric used to measure the productivity and efficiency of each employee. While it has its limitations, the general rule is that the higher the revenue per employee, the better. It is typically calculated by dividing annual proceeds by the number of employees.
For example:
- A company with annual revenue of ¥400 billion and 2,000 employees has a revenue per employee of ¥200 million.
- A company with annual revenue of ¥40 billion and 1,000 employees has a revenue per employee of ¥40 million.
For the Japanese retail industry, which we use as an example today, the average revenue per employee is said to be about ¥20 million, while the average across all industries is about ¥38 million.
3. Why is Revenue Per Employee Important?
Let’s illustrate the importance of revenue per employee using the following example.
To ensure the comparison results are clear (as comparing companies with different products and scales can be confusing), and consistent with our previous discussion on inventory turnover, for our model case, we will use appliance retailers of a similar scale selling the same products. (These model companies are fictional but based on the numbers from actual businesses.)
[Model Case]
| Company | ① Appliance Retailer B | ② Appliance Retailer C |
| Stores | 24 | 270 |
| Employees | 5,000 | 11,500 |
| Revenue Per Employee | ¥140 million | ¥80 million |
| Revenue | ¥750 billion | ¥900 billion |
| Ordinary Profit | ¥60 billion | ¥26 billion |
| Ordinary Profit Margin | 8% | 2.9% |
Company B in this model case is the same company (with updated figures) used in the previous “Inventory Turnover” article, and Company C is known as B’s rival.
Company B is primarily urban-focused, while C is a mix of urban and suburban, with the main difference being the number of stores resulting from their differing outlet strategies. However, the key points to compare here are the number of employees and revenue per employee.
Company B employs 5,000 people to generate approximately ¥750 billion in sales, while Company C employs 11,500 people to generate approximately ¥900 billion in sales. Calculated annually, B’s revenue per employee is ¥140 million, and C’s is ¥80 million, a difference of ¥60 million per employee per year.
This difference in revenue per employee directly impacts personnel costs. Assuming the average salary in the appliance retail industry is about ¥5 million, and thus the average monthly personnel cost per employee is ¥400,000, the comparison is as follows:
Company B: Total monthly personnel cost is ¥2.0 billion.
Company C: Total monthly personnel cost is ¥4.6 billion.
This is a monthly difference of ¥2.6 billion, which equates to an annual difference of ¥31.2 billion. The difference in ordinary profit between B and C is ¥34 billion (5.1% in profit margin), and it is clear that a major factor in this gap is the personnel cost resulting from the difference in revenue per employee.
If we scale C to the same employee count as B (5,000 employees) using C’s revenue per employee: C's sales would be about ¥400 billion, and its ordinary profit (assuming the same profit margin) would be around ¥11.6 billion. The difference in ordinary profit with B would be ¥48.4 billion annually.
If we scale C to the same revenue as B (¥750 billion): C would require about 9,400 employees—a difference of 4,400 employees compared to B. C's total monthly personnel cost would be about ¥3.7 billion, a difference of ¥1.7 billion from B, or ¥20.4 billion annually. This demonstrates the immense scale of this difference.
As discussed in our “Inventory Turnover” article, the gross profit margin for appliance retailers, which sell similar products, tends to be around 30% across most companies, including B and C, showing similar levels. It is generally difficult for companies in the same industry with similar sales scales and products to achieve a significant difference in gross profit margin.
In the comparison between B and C, the annual personnel cost difference of ¥20.4 billion (assuming C’s sales are scaled to B’s ¥750 billion) is equivalent to 3% of the gross profit margin. Achieving a 3% difference in gross profit margin between companies in the same industry selling the same products and operating at a similar scale is extremely difficult.
We used appliance retailers of a similar scale selling the same products as a clear model case to explain revenue per employee, but we believe such a large difference in management efficiency compared to competitors in the same industry is difficult to achieve with other indicators.
Even beyond labor-intensive businesses like the model case (i.e., in capital-intensive or information-intensive businesses where differentiation can be achieved through products or know-how), companies cannot escape the need for their workers to improve employee efficiency or (revenue per employee) as long as they have workers. Achieving a revenue per employee significantly above the industry standard directly translates into a huge advantage in the inevitable competition with rivals.
4. How to Increase Revenue Per Employee
Now that we can see the importance of revenue per employee, how do we increase it?
In case you were wondering if you can raise it by simply cutting personnel, the answer is obviously no. Revenue per employee will not increase unless a corporate structure is established that naturally drives it up. In fact, a drastic reduction could severely lower the company’s service level and potentially threaten its very existence.
The specific mechanisms for increasing revenue per employee vary by company, but looking at the retail model case, they include:
- A strategy focused on large-format stores that generate significant sales, rather than numerous small stores with higher risk and smaller sales.
- A strategy of concentrating on e-commerce ahead of competitors.
- Efficient incoming and outgoing shipments through investment in logistics networks.
- Hyper-slimming of indirect departments (like procurement and accounting) through the introduction of technology.
Finally, the most critical factor is educating employees on the importance of revenue per employee and fostering a responsive management style where the company and its employees constantly strive for creative methods to increase productivity.
In short, drastically improving management efficiency by boosting revenue per employee is achieved by the combination of People × Technology × Management Strategy.
5. Conclusion
We have once again used the retail industry as a model case to discuss revenue per employee. Business ultimately consists of workers, not only in labor-intensive industries like retail but also in capital-intensive and information-intensive industries.
Revenue per employee is a means of quantifying the optimization of these people, and particularly in labor-intensive businesses, it leads to maximizing operating profit and provides a substantial competitive advantage.
Furthermore, the concept of “managing human capital” has taken root in many companies and has become a de facto standard management approach for improving corporate value. This management approach focuses on all of the employees within a company continually pursuing creative improvements in productivity and sustained growth.
Therefore, pursuing revenue per employee offers value on two fronts: the numerical improvement of corporate value through management efficiency, and the non-numerical improvement of corporate value through human capital management.
To reiterate, business is created through people. People are the ones who develop management strategies, execute them, and utilize technology. D-POPS GROUP believes that what is needed for this is the combination of People × Technology × Management Strategy.
Based on this philosophy, D-POPS GROUP aims to realize a Venture Ecosystem that supports startup companies through investment and non-numerical value (beyond mere efficiency) so that they can contribute to society by solving issues.
We hope you enjoyed this article and look forward to working with you sometime in future.
D-POPS GROUP Managing Executive Officer
Tetsuya Watanabe
