Your sales team is hungry for more revenue, and you think the solution is simple: “Let’s go after bigger deals.”
But before you start trying to increase your team’s Average Sales Price (ASP), think carefully about the serious consequences this change could have on your business and your sales team.
Successfully closing bigger deals requires more work, more time, and often more skill. For some companies, bigger deals are worth the bigger risks, and for others, smaller deals are perfect. The optimal ASP depends on your business’ target market, your technological capabilities, your sales team’s abilities, and many other factors.
Before you completely change your sales strategy to drive up your Average Sales Price, consider the impact it will have on your team. Here’s how to analyze the sales metrics and figure out whether the benefits truly outweigh the risks for your business.
Analyze Cost of Acquisition
Before you know whether your business should target bigger deals, you must analyze customer acquisition costs (CAC). How much does it cost marketing to acquire new leads? How quickly do those leads convert to opportunities? And how many of those opportunities turn into Closed-Won deals?
Often, the price of acquiring larger customers is more expensive than the cost of winning over smaller customers. The leads require more nurturing, the opportunities convert at a lower rate, and the deals require a lengthier (and therefore more expensive) investment from your reps. However, if the price of the deal is still greater than the CAC, larger deals may be worth your time. For example, it may cost you $10,000 to win one customer, but if the customer pays you $100,000 per year, it’s obviously worth the investment. Do the math and run a detailed analysis of CAC by deal size to figure out what you need to invest in order to win those deals. If the profit is big enough, larger deals could be in your future.
Understand Win Rates
Besides the CAC, you also have to understand your team’s likelihood of closing larger deals. Every business has a sweet spot for winning deals, also known as the sales strike zone. Your sales team may be great at closing deals under 30K, but hasn’t quite gotten a handle on closing larger deals and tends to lose at a higher rate. While you may know this intuitively, you should run the numbers and analyze your sales team’s overall win rates.
This “Strike Zone” report shows exactly the deal size that your sales reps are most likely to close. In this case, deals between $1K and $10K have a 37% win rate compared to deals over $100K which have a win rate close to 0. However, deals between 10K and 100K could be a great opportunity to drive growth, with win rates around 19%. When you’re calculating the risk of chasing down the bigger deals, you have to consider that your win rate is going to be much lower. Again, if the risk is worth it to your business, you may decide to go forward and push your Average Sales Price higher.
Even after you’ve closed a few bigger deals, your work isn’t done. Look back and do a retrospective analysis of churn for those larger customers. Even if higher priced deals are worth the higher Customer Acquisition Costs and the lower win rates, are they more likely to cancel their contracts?
This churn report shows you that, in fact, your larger deals are generally less likely to churn than smaller deals. This is true in many cases, because higher value customers have invested more money into your product, so they are more invested in using your product successfully. If you find this is true at your business as well, chasing a higher ASP offers the added benefit of a lower churn rate on top of a higher overall value.
Targeting a higher ASP isn’t the right move for every business. However, if you have low enough customer acquisition costs, high enough win rates for bigger deals, and low enough churn, you should have your sales team target bigger deals. Check back next week for a detailed post on exactly how to increase your ASP quickly and effectively.