Do you want to experience a massive surge in profits? Then understanding your average deal size is the key. Average deal size can increase effectiveness, profitability and insights into your target market. But only if you calculate it correctly.
In this article, we will be taking an in-depth look at the importance of tracking your average deal sizes for your company. Whether you want to increase your ROI or simply monitor your sales team’s performance, this guide greatly benefits your organization’s bottom line.
What Is an Average Deal Size?
An average deal size refers to the total sales a company receives from selling its products or services to a customer. It’s calculated by taking the total revenue generated from a certain number of sales and dividing it by the number of sales.
Knowing your average deal size is vital in sales performance as it helps companies understand how much revenue they can expect from each customer. By analyzing this data, businesses can develop strategies to optimize and increase their average deal size, leading to higher revenue and profits.
Companies can provide additional products or services to customers, increasing the sale’s overall value. They can also offer promotions or bundle deals to encourage customers to spend more. Another strategy is to focus on selling to high-value customers likely to make larger purchases, like paying for annual subscriptions.
Importance of Average Deal Size in Sales Performance
Average deal size matters in monitoring the overall sales performance. Here are the three key reasons why.
1. Protecting business interests and assets
If the average deal size is too small, it can be costly for the business to pursue and execute the sale. The cost of sales, including marketing expenses, sales team salaries, and other operational costs, can quickly add up.
It causes the company to lose money on each deal. In contrast, a larger average deal size allows companies to break even faster or create profit, protecting their business interests and assets.
Suppose a company spends $1,000 on marketing and sales efforts to close a sale, and that sale is worth $500. In this scenario, the average deal size needs to be bigger since the company loses $500 for each sale.
However, if a company spends $1,000 on the same marketing and sales efforts and closes a deal worth $5,000, it will break even after just one sale.
2. Establishing clear expectations and performance standards
By establishing a target for the average deal size, sales teams can work towards a clear, measurable goal, which helps improve performance. This performance standard can also be valuable for future decision-making and planning.
For instance, suppose a company aims for an average deal size of $10,000 for a specific product line. The sales team can then focus on closing deals that meet or exceed this target. Sales management can review performance against this goal.
They can determine which strategies or tactics most effectively increase the average deal size.
3. Mitigating risks and potential liabilities
A higher average deal size also lowers the risk of potential liabilities for a company. It reduces the number of transactions that you need to manage. It also reduces the risk of errors, such as billing or shipping mistakes.
For example, suppose a company has 100 sales transactions in a month, with an average deal size of $1,000. If just 2% of these sales result in errors, two transactions with a combined value of $2,000 must be corrected or refunded.
In contrast, if the average deal size for the same period were $5,000, the financial impact of errors would be much higher, and the company would face more significant financial risk.
How to Calculate Average Deal Size
Calculating the average deal size refers to finding the average amount of money earned per sale. To calculate this, you need to add the total revenue generated from all sales within a given timeframe and divide it by the total number of sales made during that period.
For example, let’s say a company made $10,000 in revenue from 50 sales in a month. You can calculate the average deal size by dividing $10,000 by 50, resulting in an average deal size of $200 per sale.
Knowing your company’s average deal size can help you track sales performance and identify opportunities for improvement. If your average deal size is lower than your desired revenue, you can implement strategies to increase it.
- One such strategy is to upsell or cross-sell customers on related products or services to increase the value of each transaction.
- Another strategy is to target higher-paying customers or markets willing to pay a premium for your products or services.
- Incentivize sales representatives to sell higher-priced products or services by offering commissions or bonuses on larger deals.
By tracking and optimizing your average deal size, you can boost revenue and improve the overall performance of your sales team.
To calculate the average deal size, you need to follow these steps:
1. Data collection and analysis
Collect data on all the sales transactions for a given period, usually a month or a quarter. Then, add up the total revenue from these transactions and divide it by the number of transactions. For example, if you made 100 sales transactions that generated $10,000 in revenue, your average deal size is $100.
2. Timeframes and sales segmentation considerations
It’s crucial to consider the timeframe of the data collection and the sales segmentation. For instance, if you sell different products or services, you want to segment your data to calculate the average deal size for each product or service.
Say millennials who are employed versus those who are self-employed or running a business.
Moreover, if you compare your sales performance over different timeframes, you could identify:
- seasonal trends
- market fluctuations, or
- sales strategies
that affect your average deal size.
3. Monitoring trends and fluctuations
Finally, you need to monitor your average deal size regularly to identify any fluctuations or trends that impact your sales performance. For example, if you notice a declining trend in your average deal size, it could indicate that you’re losing customers or that your competitors offer better deals.
In that case, you might need to adjust your pricing, target market, or sales strategy to optimize your average deal size.
In summary, calculating your average deal size is a powerful way to measure your sales performance and identify opportunities for improvement.
How Average Deal Size Impacts Contract Management
Average deal size isn’t just connected to sales. It’s also a key metric in contract management.
1. Balancing deal size and contractual risk
When negotiating contracts, businesses must balance the potential profit from a deal with the risks involved. Larger deals may come with more risk, such as longer timelines or higher penalties for non-performance.
Companies can better prioritize their sales efforts. They can ensure they’re taking on the right amount of risk for each deal if they know the average deal size.
For example, a software company may focus on smaller deals with businesses with a reliable payment history rather than large deals with new customers.
2. Streamlining contract negotiation and execution
Large deals often require more negotiation and a longer sales cycle. By optimizing contract management processes, businesses can reduce the time it takes to close deals and improve their sales efficiency.
This includes
- standardized contract templates
- automating contract management workflows, and
- ensuring all parties have access to the same information.
For example, a car dealership might use a standard set of pre-approved templates to streamline the sales process for customers.
3. Adapting contract management processes to different deal sizes
Companies need to adjust their contract management processes based on the size and complexity of each deal. Smaller deals may not require as much negotiation or documentation. Larger deals may have stricter requirements.
Companies should also be prepared to scale their processes to meet changing business needs. For example, a marketing agency may need to adjust its contract management processes when they take on a new large client.
Automate Lead Generation with Fill
Do you want to increase your sales and improve your performance? But how can you do that? That’s where Fill comes in. It’s your all-in-one electronic signature and contract management solution to ensure you are on top of sales contracts 24/7.
Here are some of the features of Fill that can help you automate your lead generation and increase your average deal size:
- Customizable lead forms: Create custom forms that capture the information you need from your leads. It saves you time and ensures you have all the information required to qualify your leads.
- Integration with CRM and marketing automation: Fill integrates seamlessly with popular CRM and marketing automation platforms, such as Salesforce and HubSpot via Fill API. This ensures that all your leads are tracked and managed in one place.
- Editable contract templates: Use and repurpose legally binding contacts according to your business needs. No need to draft a contract from scratch. Choose from hundreds from the templates library.
There’s no better way to increase your average deal size than using the right tools. Thankfully, Fill is all you need for managing contracts and lead forms.
Sign up for a free account to see how Fill can benefit your business.
