once you get off the ground, one of the best ways to double up on top of your other growth, and without working more hours, is by closing bigger deals. check out this guest post by my friend mike baker at insightsquared.
New data reveals why it may be more important to close bigger deals than it is to close more deals.
If you’ve ever attended a Sales Kickoff, you’re probably all too familiar with this common Sales VP stump speech.
[Excited Sales VP stands in front of sales team pounding fist on lectern]
“This is going to be our year, team! We’re going to work more deals, we’re going to close more deals, and we’re going to bring in the most revenue we’ve ever brought in!”
This type of rah-rah speech has been a fixture at sales meetings for years, and there’s no reason to believe it’s going anywhere any time soon. But the “Let’s close more deals!” speech is missing something crucial, something that most people ‒ even those who have been in sales for decades ‒ often miss.
Increasing revenue isn’t always about closing more deals. It’s also about closing bigger deals.
This realization was hammered home recently when InsightSquared conducted a comprehensive benchmarking analysis of the tech industry. In fact, the data was very clear: companies that are able to increase their Average Sales Price (ASP) perform better in a number of critical areas.
But before we dig into the data, it’s useful to step back and look at the value of big deals from a more general perspective.
What’s So Great About Big Deals?
It’s not surprising that companies that are able to increase their ASP see certain improvements and benefits. What is surprising is how varied and extensive these benefits are.
In their recent book, “From Impossible to Inevitable,” Aaron Ross and Jason Lemkin take the time to explore some of these virtues.
Here are some of the benefits:
- Better return on sales reps’ time
- Improved service for fewer, more important customers
- Increased product adoption from new customers (because they’re more “pot committed”)
- More cash for you up front
Clearly, increasing ASP is like unlocking a door to a world of virtues ‒ but what does the data say about companies that are able to move upmarket?
The Relationship Between ASP and Bookings
As soon as we crunched the numbers of our customers, one conclusion practically leapt off the spreadsheet: bigger deals means more annual bookings. Regardless of how many deals a company sold (that varied a lot), sales teams with larger ASPs brought in more each year.
In other words, everything else being equal, ASP had the most direct correlation to an increase in bookings.
Here’s how it broke down:
|Average Sales Price||Annual Bookings||% Increase|
|Less than $1k||$24k||N/A|
|More than $30k||$9.6M||140%|
(You can play around with the interactive benchmarks yourself here)
Those are some pretty telling numbers. In all of our data, nothing predicted an increase in annual bookings as reliably as an increase in ASP.
On the flip side, when we segmented companies by the number of deals they closed each month, we found very little correlation with improved results in other areas. In fact, once we normalized for the size of sales teams (by measuring bookings per sales rep, we found that companies closing the fewest deals each month (fewer than 10) had the highest bookings totals.
Here’s how it broke down:
|Average Deals/Month||Bookings/Sales Rep|
|Fewer than 10 deals/month||$49k|
|More than 250/month||$15k|
However, as important as big deals were for all types of companies, when we zoomed in on SaaS companies, the results were even more stark.
Big Deals Are Even More of a Big Deal in SaaS
As Aaron and Jason mentioned in “From Impossible to Inevitable,” one of the real benefits of increasing ASP is the effect is has on customer satisfaction. Companies that are willing to invest a lot of money into your solution, are much more likely to adopt it and continue to use it for long after the “new car smell” is gone.
This commitment to your product is likely to have an impact on perhaps the most important SaaS metric of all: churn.
ASP and Churn
An obvious conclusion to draw from this is that a higher ASP is likely to reduce in a lower churn rate, as higher-paying customers receive better service and are likely to feel more committed to your product.
We wanted to see if this hypothesis was true, so we divided more than 30 SaaS companies into ASP buckets and analyzed how this affected revenue churn rate.
Here’s what we found:
|Average Sales Price||Revenue Churn Rate|
|Less than $1k||4.3%|
|More than $30k||2.5%|
As you can see, there is indeed a strong correlation between higher ASP and lower revenue churn. The two cohorts with the highest churn rates had the lowest ASPs, and the two cohorts with the lowest churn rates had the highest ASPs.
ASP and LTV
Customer retention is an essential KPI for SaaS companies, but it’s only one half of the equation. The other half is how much revenue you’re likely to earn from each customer at all. Unsurprisingly (by this point, at least), ASP correlated strongly with LTV as well.
|Average Sales Price||LTV|
|Less than $1k||$2k|
|More than $30k||$363|
Combined, these two analyses make a pretty straightforward and convincing point: The more a SaaS business charges for its product, the longer they can expect to keep their customers and the more they can expect to make from them.
By this point you may be saying “Ok, so to make more money, all I have to do is charge more for my product. Easier said than done.”
And that’s true. Raising your ASP (especially when it means moving upmarket) is hard, and it doesn’t always pan out. The implicit linchpin of raising your price, is having a product that’s worth it, and there are no shortcuts to that.
What the data shows, though, is that companies with higher ASPs are more likely to have higher bookings totals and more successful and loyal customers. Knowing that, it’s a good idea to market and sell to bigger potential customers, and maximize ASP over total deal volume.