Navigating the current economic storm, startup founders have to focus on the key resource for their early-stage startup to survive and grow — the people. The biggest difference, however, between hiring in a healthy economy and hiring now is that there’s no room for mistakes.
According to Harvard Business Review, the price of a bad hire is 30%–50% of their salary, which can hit startup budgets hard in 2023. To make fewer mistakes, founders should adopt a more data-driven approach to hiring.
A good start is to track these three metrics:
Startup founders have to focus on the key resource for their early-stage startup to survive and grow — the people.
Сost per hire
Cost per hire is one of the most essential business metrics, which must be included in a company’s profit and loss report. It helps a recruitment team test different strategies, as well as spot areas where they can trim costs and optimize hiring.
This metric is used to calculate the total expenses a company incurs to attract, recruit and onboard employees. To calculate cost per hire, you would add up all the direct and indirect costs of the hiring process and divide it by the number of hires made within a specific period.
First, define the period. It can be a month, a quarter, half a year or a year. I track the cost per hire monthly to continually optimize the process.
Second, tally up all expenses. Take into account the internal costs such as salaries and bonuses of recruiters, licenses for corporate email accounts, the cost of applicant tracking system software and LinkedIn Premium, and education courses for new employees.
Also, include the external costs of job ads and referral programs, fees of staffing agencies, as well as background checks and relocation expenses.
Cost per hire ($) = (Internal recruiting costs + External recruiting costs) / Number of hires made
If your company spends $10,000 on recruiting per month and hires four people, the cost per hire is $10,000 / 4 = $2,500.
For an early-stage startup, a reasonable cost per hire is valued between $3,000 and $5,000. A recent study says the average benchmark is $4,700. If the cost is over $6,000, it makes sense to review your strategy.
To identify the stages incurring the highest costs and find ways to cut expenses, it’s essential to assess each recruitment stage. If candidates decline your offer, gather feedback about the reasons for rejection and conduct new research on market salaries — you may be offering too little.
When you don’t hire frequently, outsourcing recruitment may be more cost-effective than handling all operational costs internally. Compare your current recruitment expenses to the pricing plans of recruitment agencies, which usually charge 15%-35% of a new hire’s annual salary.