The Average Selling Price (ASP) of a company’s products is a metric that is often ignored. CEOs and Sales VPs often focus more on such metrics as revenue, total number of deals or number of pipeline opportunities when making both high-level and nitty-gritty decisions. However, the truth is that knowing your ASP across the board is a critical aspect of effective sales management. Being able to identify the average size of your deals can provide a wealth of meaningful insights that drives more efficient sales management and C-level decisions. Here are 5 reasons why you need to know your ASP to be an effective sales manager.
1. Create and refine your sales process
If your company has publicly declared a quarterly revenue goal of $100,000 and your ASP is $1,000, this lets you know that your team has to convert approximately 100 deals this quarter. From there, based on your historical conversion rates, you can then determine how much pipeline you need to hit your quota and how many sales reps you need to work on these opportunities.
By working backwards with your goals in mind and your ASP in hand, sales managers can more efficiently and accurately delegate resources. Keep in mind all the various factors that contribute toward the Customer Acquisition Cost – how many sales reps you’ve hired, how much you’re paying each rep, what kind of support team you have backing up these reps, etc.
The ASP also lets you compare yourself to your competition to see if you are optimally pricing your product. If your direct competitors have an ASP that is dramatically lower than yours, perhaps tweaking the prices of your (superior) products down a little bit could significantly increase your win-rate as you pilfer some customers away from the competition.
2. Forecast more accurately
Deals that are worth more (2x or more above the ASP) tend to have smaller win rates and longer sales cycles. Sales managers need to consider this grain of salt when forecasting, instead of just applying blanket approaches and treating all opportunities in the pipeline as the same. If a company’s won/lost percentage for all opportunities is at 18%, sales managers who don’t consider the ASP might simply apply that conversion ratio and produce a lofty revenue forecast that is, unfortunately, inaccurate.
Instead, consider what happens when the Opportunity Won/Lost report is filtered to include only the top quarter of deals by size. Now, the winning percentage has dipped to just 7%. Proactive sales managers will consider this lower win rate among larger deals and apply that as necessary to produce a more accurate sales forecast.
3. Are you fishing in the right pond?
Every sales organization has determined what they believe to be their Ideal Customer Profile (ICP)…but what if this profile is wrong and the company has been targeting the wrong market? Monitor how your ASP is trending over time. If the average deal size is increasing significantly quarter-over-quarter, this might indicate that larger customers are more interested in your product, behooving your marketing team to shift more of their efforts toward targeting these bigger organizations. However, if your ASP is decreasing, perhaps smaller clients looking for a cheaper product might be the right sets of customers to go after.
Knowing your ASP also allows sales managers to find the ‘sweet spot’ for their sales teams. By looking at conversion rates for both big deals and small deals, managers can ascertain which customers reps should be spending most of their effort on. For example, if a team’s winning percentage on opportunities with an ASP of $10,000 is 25% and it’s winning percentage on opportunities with an ASP of $5,000 is 60%, the metrics suggest that opportunities with smaller ASP’s might provide more bang for this company’s buck.
4. Determine what kind of ROI you need from marketing
Marketing drives much of what sales does by providing qualified leads. However, marketing also requires a heavy budgetary investment. Knowing your ASP and segmenting it by lead sources gives sales managers the chance to narrow down not only what kind of ROI they’re getting from their marketing efforts but also which individual lead sources are the most valuable and worth pursuing further. Tossing away marketing dollars on lead sources that bring in scant large opportunities with exceptionally high ASPs and that don’t convert as well might not be as fruitful as targeting lead sources that bring in tons of smaller leads, many of whom convert at a high rate.
5. Build the right features for the right people
For companies that are regularly updating their features and adding new capabilities, knowing the ASP is a critical component to guiding your improvements and ensuring that you’re building the right in-demand features. If most of your new additions are features for enterprise-level companies, but your ASP is remaining at a low level or even decreasing, your new features will primarily fall on deaf ears. However, if your ASP is spiking sharply, this suggests a recent influx of new larger customers who would be ecstatic to hear about your spate of new enterprise-level features.