The Impact of Average Deal Size on Sales Growth

The metric, Average Deal Size  is one of the most powerful and least utilized levers for increasing overall sales. 

When companies think of increasing their sales, they typically think of hiring more sales reps, attending more conferences, or running more marketing programs. While these may increase sales, they will also increase costs at the same or greater rate. In other words, these are not scalable strategies.

So, how can companies increase sales without a proportional increase in costs?

Increasing the average deal size doesn’t incur any associated costs. It doesn’t require a change in your product price—therefore, your ROI remains the same. It just means you sell more per opportunity.

Therefore, it doesn’t require any new activity. Nothing is changed at the product level—no additional product reconfiguration or support is required. It comes about by changing how your prospective buyers see their own problem (s) and solution (s). It is about the effectiveness of your sales organization in bringing about this change in the buyer’s viewpoint.

Before we discuss how to change it, let’s first discuss the most useful way to look at your Average Deal Size.

The Right Way to Think About Average Deal Size

When we ask clients what their Average Deal Size is, we typically get a response like, “Well, it ranges from ‘x’ to ‘y…’’ or “I will have so and so run those numbers for you since it changes from year to year…”

We reply back, “Can you give us a list of all the deals each of your sales rep closed in the past 12 months? What we need is the amount and the name of the sales re.”. We then create a chart similar to the one you see below. Please note that the numbers below are simply for illustration purposes and yours could be quite different.

Let’s unpack the above chart.

  • The chart shows the sales performance for ten (10) sales reps in the order of their total sales for a given period.
  • All ten reps sell into comparable territories and have access to all the products/services that the company offers.
  • We grouped the ten reps in three tiers to show their effectiveness at selling the company’s products and services: the top two reps in Tier 1; the next four reps in Tier 2: and the bottom four in Tier 3.
  • If we simply took all 100 deals sold by the ten reps and divided it by the total Sales ($5.81 million), we would arrive at $58,145 as the average deal size.
  • However, when we look at the Average Deal Size (ADS) by tier, we see starkly different numbers. In fact the ADS for Tier 1 is 3.4 times that of Tier 3 and 2.1 times that of Tier 2. 
  • This is the same as saying that Tier 1 sales reps are three times as effective as Tier 3 reps, and twice as effective as Tier 2 reps This is a huge gap in sales effectiveness!
  • One more point to note:  you will notice that the top tier reps work on fewer deals than the bottom tier reps—which is again, an indication of gaps in sales effectiveness.

Closing The Sales Effectiveness Gap to Improve Overall Sales Growth

Next, let’s see what happens to overall sales growth when we close the effectiveness gap—i.e. We closed the Average Deal Size (ADS) gap between the top and bottom sales performers.

Let’s say we improved the ADS of Tier 2 and Tier 3 reps by 33.34% two thirds 66.67% respectively. You may ask, “Why not improve it by the same amount?”. We are just following the nature of how change happens: It is easier and quicker to change the performance of those who have a lot to improve than those who have less to improve. For instance, it is easier to improve our grade from ‘D’ to ‘C’ than from ‘C’ to ‘B’—it gets harder to go from ‘B’ to ‘A’ and significantly harder to go from ‘A’ to ‘A+’.

So, to make this a practical exercise, we will improve the bottom performers at twice the rate of the middle performers—who are also being improved at a sizable rate.

Let’s unpack this second chart.

We see that the Average Deal Size (ADS) for Tiers 2 and 3 have been adjusted by 33.34% and 66.67% respectively.

  • We see that the gap in sales performance between the top and bottom performers was cut to 2.1 from 3.4. Rather than the top performers being three times as effective as the bottom performers, they are now twice as effective. Similarly, the gap between the Top and middle tier also improved to just 1.5 times (50% more) as effective, rather than twice as effective. 
  • We also see that the total sales improved by nearly 14% to $6.62 million—without any change to sales payroll or marketing expenses. I don’t know about you, but I consider increasing sales by 14% without any additional spending a pretty good deal.

But, can we do more?

Stage 2 Improvements to Maximize Sales Growth

Remember what we said earlier? That increasing the performance of those who have a lot to improve is relatively easier than those who are reaching peak performance? Following that principle, we continue to work on the bottom performers first before going to the middle tier

What happens if we improve the performance of Tier 3 by another 30%?

  • We see that we closed the gap between Tier 1 (top performers) and Tier 3 (bottom performers) some more to just 1.6 times. Or, Tier 1 reps are now just 60% better than tier 3—not 340% better, which is where we started.
  • Also, the total sales grew by 45% from what it was when we started—again, with no additional spending required!

Next, what if we improved Tier 2 by another 15%?

Now, we see that Tier 2 is within 30% of the performance of Tier 1.

And, sales are 54% higher than when we started at $8.93 million.

In other words, we achieved a 54% increase in sales—without any additional spending or product change—simply by improving the performance of the sales team.

Next, let’s see how we can do that.

Factors That Driver the Average Deal Size

So, what drives the average deal size? Why did Tier 1 reps show average deal sizes that were 3.4 times larger than the tier 3 performers?

At its essence, the Average Deal Size metric is a function of three factors:

  1. The Buyer’s pain – how compelling and urgent it is
  2. The Seller’s Product Value Proposition – how clear and compelling it is with respect to the Buyer’s pain and needs.
  3. The Sales reps competency – how well the sales rep can discover the Buyer’s pain, show the Buyer’s the extent of the problem in quantifiable terms, demonstrate the ability of the Seller’s solution in addressing the pain, and proving to the Buyer that the Seller’s solution is the most cost-effective and best fit of all alternatives.

Therefore, the key variable is #3—a particular sales rep’s competency. The Buyer’s pain and the Seller’s solution are common to all your sales reps. The most competent sales rep will make the most out of any given sales situation and generate the largest deal size possible there.

What do we mean by Sales Competency?

Our last question is: What drives sales rep competency? What makes one sales rep two or three times more effective than another?

The difference is competency as demonstrated by value to the buyer. If the Buyer perceives your sales rep as immensely valuable to her, she will trust that sales rep’s recommendations. If not, she sees that sales rep as a waste of her time.

Everyone wants to talk to the relevant Subject Matter Expert (SME)—Buyers do, so do your own internal people, suppliers, partners, even your competitors. The SME has insights into how to solve a big and pressing problem that others don’t.

But, becoming a SME takes years of dedicated work, which is why there are so few true SMEs. And, it is the nature of the SME to want to be an expert—to have the curiosity, interest, drive, and work ethics to be an expert.

Your average sales reps likely don’t have these characteristics—at least not to the extent necessary to be a SME.

However, even the average sales rep can be Subject Matter Knowledgeable (SMK), which means that he or she is still of great value to the prospective Buyer and certainly not a waste of her time.

Here is a checklist to help you analyze and resolve gaps in performance within your sales team:

The Average Deal Size Maximizer Checklist

Industry Knowledge

  1. Do your sales reps understand the industry or segment into which they are selling? Do they understand the dynamics of that industry—how companies in that space compete and make money?
  2. Can they outline the key challenges this industry faces?
  3. Do they see where the major trends are for this industry?
  4. Can they help prospective Buyers identify and navigate through the opportunities and threats that are unfolding in the near future?

Buyer Persona Knowledge

  1. Have your reps carefully picked who they want to speak with?
  2. Can they picture the daily life of that prospective Buyer? Do they know what she deals with, what she is responsible for, what she is expected to deliver?
  3. Do they understand how she is measured and compensated? What risks and rewards are she keeping her eyes on?
  4. Do they know who her influencers are? Where does she get her trusted information from?

Uncovering Pain

  1. Do your sales reps know how to get your prospective Buyers to open up and talk to them freely? Why would prospective Buyers do that and when will they do that?
  2. Do your reps know what to research themselves and what to ask Buyers? Do they know in what order they need to ask questions so that the Buyer is more and more willing to share information?
  3. Are your reps equipped with the right follow up questions to ask so that the Buyer begins to see the magnitude of her problem and sees it urgently for herself?
  4. Do they know how to ask the questions in such a way that the Buyer volunteers to bring in others so the scope of the problem is now much bigger than it was initially thought to be?

Dollarizing Pain

  1. Does your sales rep know how to ask the necessary background questions so he can do basic calculations to turn the problems discussed into dollars for the potential Buyer?
  2. Can your sales rep create a compelling presentation around this so that the cost of the solution is far less than the cost of the problem?

If your sales rep can competently do the above, not only are they likely to increase their Average Deal Size, but also close these deals at a higher rate.

This is essentially what your top reps are doing: they are focusing on fewer opportunities, doing a thorough job of helping their prospects understand their situation and how to improve it, and thereby closing large deals at a higher ratio.

So, What Does This All Mean?

If you have read this far, you are wondering if what is required here is sales training. Sure, sales training is useful and probably a good idea to have your reps go through sales training once every year or every other year. 

However, numerous studies show that we tend to forget about half of what we have learned within days.

A more effective way of improving the performance of your Tier 3 and Tier 2 reps is to provide them with the tools that help them effectively navigate through a prospecting or a discovery call—having the answers to the questions in the checklist above at their fingertips while they are doing the prospecting or discovery call.

Customers who use the SOMAmetrics Intelligent Prospecting solution are realizing up to 50% improvement in their sales pipeline within 90 days.If you would like to discuss this more, please click here to schedule a call at your convenience.