The RevOps Playbook Series: Part 1 Defining and Operationalizing Average Deal Size

Introduction

Average Deal Size is a key metric for B2B SaaS companies, providing insight into pricing strategy, market positioning, and sales performance. However, to effectively leverage this metric, it's crucial to understand how it's defined, calculated, and optimized.

Defining a "Deal"

The first step in analyzing Average Deal Size is to establish what constitutes a "deal." For most SaaS companies, a deal represents a closed-won contract with a customer. However, there are several factors to consider:

• New vs. Existing Customers: Are you including only new customer contracts in your deal size calculation or renewals and expansions from existing customers? Including all deal types will give a comprehensive view, but segmenting by new vs. existing can provide additional insight.
• Recurring vs. One-Time Revenue: SaaS companies typically focus on recurring revenue, but one-time fees like setup fees, professional services, or hardware costs may also be part of some deals. Decide whether to include these in your deal size calculation, and be consistent.
• Minimum Deal Size: Some companies set a minimum deal size threshold, below which a contract isn't considered a "deal." This helps focus the team on higher-value opportunities. If you have a minimum, factor it into your calculations and analysis.

Deal Stages & Probability

The deal stage and probability also impact Average Deal Size calculations. Most SaaS sales teams use a pipeline with defined opportunity stages, each with an associated probability of closing. For example:

• Discovery (10%)
• Demo (20%)
• Proposal (50%)
• Negotiation (70%)
• Closed Won (100%)

When forecasting average deal size, it's important to probability-weight the deals in the pipeline based on their stage. A $100K deal in the Discovery stage is worth less in the forecast than a $100K deal that's in Negotiation.

Some deals may also skip or repeat stages. A referral may bypass the Discovery stage and go straight to a Demo. Or a deal may move from Proposal back to Demo if the scope changes. Having clear pipeline management processes and ensuring data hygiene is key to accurate forecasting.

Pricing & Packaging

Your SaaS pricing model and packaging also significantly impact Average Deal Size. Value-based pricing, usage-based pricing, per-user pricing, tiered pricing, and other models will yield different deal sizes.

For example, a company that prices per user with a $50/user/month list price would have a smaller average deal size than a company that prices based on usage volume and charges $1000/month minimum.

Discounting also impacts deal size. Offering a discount to win a strategic customer or close the quarter strong might boost revenue short term but decrease average deal size. Standardizing discounting practices and approval processes can help maintain pricing integrity.

Packaging is another deal-size lever. By bundling features or products into different package tiers, you can provide a range of options at different price points to suit different customer segments and budgets. Thoughtful packaging can increase the average deal size by making the higher-tier packages more compelling.

Analyzing Average Deal Size

With the above factors in mind, you can calculate the Average Deal Size for a given period with the following formula:

Average Deal Size = Total Bookings ($) / Number of Deals Closed (#)

However, the real insight comes from segmenting your calculation:

• New vs. Existing Customers: Calculate separate average deal sizes for new customer contracts vs. expansion revenue from existing accounts. A higher average deal size for existing customers indicates strong account expansion and net revenue retention.
• Customer Segments: Segmenting deal size by customer industry, company size (enterprise vs. SMB), or geography can highlight which segments are most valuable. This informs ICP definition, sales territory planning, and ABM campaigns.
• Sales Rep/Team Performance: Analyzing average deal size by sales rep or team can identify top performers and coaching opportunities. If one rep consistently closes larger deals, what tactics can be replicated?
• Product/Package: Comparing average deal sizes across product lines or package tiers helps optimize packaging and pricing. Which products or tiers drive the largest deals?

Trending average deal size over time is also critical. Is deal size increasing, decreasing or flat? How does it compare to the overall market and competitors? Fluctuations in average deal size can be an early indicator of changes in market conditions, competitive pressure, or internal sales discipline.

Benchmarks & Optimization

B2B SaaS average deal sizes vary widely based on target market and business model, but some helpful benchmarks include:

• SMB-focused SaaS companies typically range from $5K-$20K average deal size
• Mid-market SaaS companies typically range from $20K-$100K average deal size
• Enterprise SaaS companies typically range from $100K-$1M+ average deal size

To optimize Average Deal Size, SaaS companies should focus on:

1. Value-Based Pricing: Aligning pricing to the value customers receive ensures you're capturing fair wallet share for the impact you deliver, driving up deal sizes.
2. Packaging: Thoughtful feature and capability bundling into good/better/best package tiers with clear value inflection points motivates buyers to purchase the higher-priced tiers.
3. Expansion Paths: Defining clear expansion paths for customers to add seats, unlock new features, and upgrade packages increases revenue per account over time.
4. Sales Enablement: Training sales reps on effective discovery, objection handling, negotiation tactics, and value selling methodologies arms them to win larger deals consistently.
5. Target Market Alignment: Focusing marketing and sales efforts on the ideal customer profiles that are likely to generate the largest ACV maximizes sales efficiency and average deal size.

Ultimately, Average Deal Size is a crucial metric for the overall health and trajectory of a SaaS business. By analyzing it thoughtfully and taking steps to optimize it, companies can drive efficient growth and profitability.