How to Calculate Average Deal Size?
Calculating average deal size is relatively straightforward– you just need to know how much revenue you’ve generated as an organization and the number of deals your team has closed during the given time period. The average deal size formula looks like this:
Average Deal Size = Total Revenue Generated / Total Number of Closed Won Deals
For example, if a company generates $500,000 in revenue by closing 50 deals, the average order size would be $10,000 ($500,000/50).
How do companies use Average Deal Size as a KPI?
Companies use average deal size as a key performance indicator (KPI) to measure sales performance and forecast future revenue. An increase in average deal size indicates that the sales team is closing larger deals, which ultimately increases the company’s revenue. This KPI helps companies in making data-driven decisions about sales strategies and budget allocation.
Factors that impact Average Deal Size
Several factors can impact how big or how small a company’s average deal is.
- Product Mix– If a company has a product portfolio with a wide range of products, the average deal size may vary depending on the mix of items customers purchase. Conversely, a company with a narrower product portfolio may have a higher average deal size. The more expensive a product range, the higher this KPI will be.
- Sales Cycle–A longer sales cycle may indicate that the sales team is working on larger deals that take more time to close. This can result in a higher average deal size. This is something typically seen at SaaS companies.
- Target Market– If a company focuses on selling to enterprise-level customers, the typical deal size may be higher than that of a company that focuses on selling to small and medium-sized businesses.
How to Improve Average Deal Size
Businesses can improve average order size in a few different ways. Here are just a few:
- Upselling and Cross-selling– Look for opportunities to offer additional products or services to your existing customers. This can be achieved by suggesting related or complementary products, or by offering upgrades to existing services.
- Value-based pricing– Shift the focus from the price of the product or service to the value it provides. Highlight the benefits and the unique value proposition of your offering to justify a higher price.
- Bundle pricing– Offer bundled packages that provide more value for a higher price. This approach can work particularly well if you can offer packages that are more cost-effective than purchasing each item individually.
- Strategic positioning– Position your products and services as premium or exclusive, and highlight their unique features and benefits. This can help you command a higher price for your offerings.
- Target higher-value customers–Focus on acquiring high-value customers who have a greater willingness to pay for your products or services. This can be achieved through targeted marketing campaigns, account-based selling, and other strategies.
- Increase customer loyalty– Invest in training your sales reps to build strong relationships with your existing customers. This can lead to repeat business and referrals, which can ultimately increase the average deal size.
- Discounts and Approval Processes–Monitor discounts and deals your team leverages to close deals. Implement an approval process to keep an eye on how aggressive your teams are discounting products– and therefore lowering your company’s average contract size.
By implementing these strategies, you can increase the average deal size and ultimately drive more efficient revenue growth for your business.
Why is Average Deal Size important?
Average deal size is an important metric used to analyze the performance of a sales team and to forecast future revenue. A higher average deal size indicates that the sales team is closing larger deals, resulting in increased revenue for the company. Additionally, analyzing the average deal size can help companies in identifying areas for improvement in their sales process– particularly if measured consistently over time.
What you need to know about Average Deal Size
To effectively use this KPI to make more data-driven decisions, companies must ensure the accuracy of their sales data including revenue targets, closed won opportunities, average amount of discounting that happens, and more. This also means ensuring that all sales data is recorded and that the calculations for the average order size are correct.
Companies should also consider analyzing the average deal size in conjunction with other sales metrics such as win rate, sales cycle length, and customer lifetime value. Analyzing these metrics together can provide a more comprehensive understanding of sales performance and help identify areas of improvement.
It is also important to keep in mind that the average deal size can vary depending on the industry and the type of product or service being sold. Therefore, companies should benchmark their average deal size against their competitors in the same industry to gain a better understanding of their performance.
The Impact of Average Deal Size
A high average deal size can have a significant impact on a company’s revenue and profitability. When the sales team focuses on closing larger deals, the revenue generated from each deal increases, which in turn can increase the company’s overall revenue and profitability.
Furthermore, a higher average deal size can indicate that the sales team is targeting higher-value customers and closing deals with a higher profit margin. This can also result in increased profitability for the company.
On the other hand, a low average deal size can indicate that the sales team is not closing larger deals and may be focusing on lower-value customers. This can lead to lower revenue and profitability for the company.