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The Cost per Hire Nuance Your Recruiting Team Doesn’t Appreciate

This week's Whiteboard Wednesday focuses on cost per hire vs marginal cost per hire.

Phil Strazzulla
HR Tech Expert, Harvard MBA, Software Enthusiast
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Most talent acquisition teams are familiar with cost per hire. It's a core metric for understanding the efficiency of your recruiting function, and is simply calculated as the total recruiting budget divided by the total number of hires your organization has made.

Cost per hire will include things like third party recruiters, job board spend, technology (ATS, Recruitment CRM, assessment, etc), internal recruiters, career site CMS, and everything else that goes towards meeting your hiring goals.

The average cost per hire in the United States is just over $4,000 according to SHRM. From the reports we've read, this is a pretty good estimate. Of course, a company that hires only PhDs will have a much higher cost per hire, just as a quick service restaurant that needs comparably lowered skilled labor will have a lower cost per hire.

Within an organization, you no doubt also have very different costs when you look at exec recruiting vs engineering vs customer success vs etc. As a business, it's very useful to know how much on average it costs you to hire an engineer so that you are aware of your most and least expensive channels.

Marginal Cost Per Hire

However, it's really not enough to think about your cost per hire by function. I know, most orgs aren't even there yet. But, hear me out as I think understanding what marginal cost per hire means and why it's important will help you make a plan to get to where you need to be when it comes to understanding this very important data in your organization.

Your marginal cost per hire is the cost of hiring one more person in your company (or a given function in your company). For example, let's say we have a cost per hire of $10k per each engineer in our company. We might get that by adding up all the costs associated with engineer hiring (recruiters, media spend, tech, engineer time, etc) and dividing that by the number of hires. That's a really great number to know, own, and optimize.

However, how much should it cost us to hire one more engineer? Should it be $10k? Well, that number includes fixed costs like ATS spend, your employer branding budget, your career site, etc. So, we'd actually want to shoot for a much lower number.

What is that number? Well, we need to understand how much we're paying for each incremental hire. To get another hire, you will need to expend some recruiter time, but they'll already be using tools you pay for. You may have to spend some money on job boards, but you already have those contracts and so may be trying to hit minimums, or may be capturing volume discounts at this point. Chances are, your marginal cost per higher is much lower than your average.

However, it may actually be that we're spending MORE than our average. Think about an unrealistically small talent market where there are only 100 people with a given skill set. We employ 15 and each year we hire another 3 from word of mouth in that community. What if we want to hire 5 this year?  We'll probably have to spend money on a recruiter or at least sourcing.

Paid Media and Marginal Cost Per Hire

The most important way to use marginal cost per hire is to decide where to deploy your paid media dollars. When thinking about one job board vs another, you need to think about which will deliver the best incremental cost per hire. Of course, using a top programmatic job ads platform will do a lot of this work for you.

This is the same framework you should apply to new channels. If your incremental cost per hire for sales people is $3k, then that is the bar that new channels need to hit.  It doesn't matter than your overall cost per hire is $10k, you can get more sales people for $3k which becomes your par for new vendors to hit.

How is your team thinking about cost per hire?  Do you break it out by function? Do you think about incremental vs total cost?

Want to know more about hiring?

Phil Strazzulla
HR Tech Expert, Harvard MBA, Software Enthusiast
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Phil is the founder of SelectSoftware Reviews, a website dedicated to helping HR and Recruiting teams find and buy the right software through in-depth, expert advice. He has bought over $1 million worth of HR and Recruiting tools. Additionally, as of 2023, nearly 3 million HR professionals have relied on his advice to determine which business software they should buy.

Phil studied finance at New York University and started his career working in venture capital before getting his MBA from Harvard Business School. His in-depth understanding of the Saas landscape, especially HR Tech, stems from nearly a decade of researching and working with these tools as a computer programmer, user, and entrepreneur.

Featured in: Entrepreneur Harvard Business School Yahoo HR.com Recruiting Daily Hacking HR Podcast HR ShopTalk Podcast Employer Branding for Talent Acquisition (Udemy Course)

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