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Estd 4.22.2023
In the competitive landscape of SaaS, understanding your average deal size (ADS) by customer segment isn't just a nice-to-have—it's essential for strategic decision-making. While many executives track overall ADS, the real insights emerge when you break this metric down across different market segments. This segmentation reveals opportunities for revenue optimization that might otherwise remain hidden.
Why Average Deal Size by Segment Matters
Average deal size by segment helps you understand where your revenue is coming from and which customer groups offer the highest value. According to OpenView's 2023 SaaS Benchmarks report, companies that analyze deal size by segment experience 27% higher revenue growth compared to those that don't.
This metric directly impacts:
- Sales team structure and compensation
- Marketing budget allocation
- Product development priorities
- Customer success resource deployment
The Basic Formula for Average Deal Size
Before diving into segmentation, let's review the fundamental calculation:
Average Deal Size = Total Revenue / Number of Deals
For example, if your total monthly revenue is $500,000 across 100 deals, your overall ADS is $5,000.
How to Segment Your ADS Effectively
Step 1: Define Meaningful Segments
Start by identifying customer segments that are strategically relevant to your business. Common segmentation approaches include:
- Company Size: Enterprise, mid-market, SMB
- Industry Vertical: Healthcare, finance, retail, education, etc.
- Geographic Region: North America, EMEA, APAC, etc.
- Product Tier: Basic, Professional, Enterprise
- Customer Lifecycle Stage: New vs. expansion deals
- Acquisition Channel: Direct sales, partnerships, self-service
According to Profitwell research, SaaS companies using at least three segmentation dimensions for pricing and packaging achieve 30-50% higher lifetime value than those using fewer dimensions.
Step 2: Extract and Organize Your Data
To calculate ADS by segment, you'll need:
- Revenue data from closed deals
- Segment classification for each deal
- Time period for analysis (quarterly is often most useful)
Most CRMs allow you to export this data or create custom reports. Ensure your CRM has clean, consistent segment tagging to make this analysis possible.
Step 3: Perform the Calculation for Each Segment
For each segment, apply the basic formula:
Segment ADS = Total Revenue from Segment / Number of Deals in Segment
For example:
- Enterprise: $1,000,000 / 50 deals = $20,000 ADS
- Mid-market: $300,000 / 60 deals = $5,000 ADS
- SMB: $200,000 / 200 deals = $1,000 ADS
Step 4: Create Visualization for Clear Insights
Transform your calculations into visual formats that make patterns obvious:
- Bar charts comparing ADS across segments
- Time series charts showing segment ADS trends
- Heat maps showing ADS by industry and company size
Tools like Tableau, PowerBI, or even Excel can create these visualizations effectively.
Advanced Analysis Techniques
Examining Deal Size Distribution
Beyond averages, understanding the distribution of deal sizes within segments provides deeper insights:
- Calculate the median deal size for each segment to identify if a few outliers are skewing your average
- Determine deal size quartiles to understand value distribution
- Identify minimum and maximum deals to understand your range
According to Gainsight's Customer Success Industry Report, the most successful SaaS companies not only track average deal size but also monitor the distribution, allowing them to identify opportunities for upselling within specific segments.
Tracking ADS Changes Over Time
Temporal analysis reveals critical trends:
- Compare segment ADS quarter-over-quarter and year-over-year
- Correlate changes with product updates, pricing changes, or market conditions
- Identify seasonal patterns in deal size by segment
Factoring in Cost of Acquisition
To truly understand segment profitability, combine ADS with CAC:
Segment Efficiency Ratio = Average Deal Size / Customer Acquisition Cost
This calculation often reveals surprising insights about which segments are truly driving profitable growth.
Using ADS by Segment for Strategic Decision-Making
Once you have calculated and analyzed your ADS by segment, you can apply these insights to:
Refine Your Ideal Customer Profile (ICP)
If your enterprise segment shows an ADS of $50,000 with a 90% renewal rate, while your SMB segment shows $2,000 with a 60% renewal rate, this may suggest reallocating resources toward enterprise customers.
Optimize Your Pricing Strategy
Dimensional analysis of your ADS may reveal pricing inefficiencies. For example, if healthcare customers consistently pay 30% more than retail customers for the same tier, you might consider industry-specific pricing.
According to a Price Intelligently study, companies that implement segment-based pricing see a 30% increase in revenue within 12 months.
Align Sales Compensation
Tailor commission structures based on the ADS potential of different segments to incentivize the right behaviors.
Guide Product Development
Segments with higher ADS often justify dedicated product features. By understanding which segments pay more, you can prioritize development resources accordingly.
Common Pitfalls to Avoid
When calculating and using ADS by segment, watch out for:
- Insufficient sample size: Ensure each segment has enough deals to provide statistically significant data
- Inconsistent segmentation: Maintain clear definitions for each segment across your organization
- Ignoring contract length: A $24,000 two-year deal is different from a $12,000 annual deal
- Focusing solely on averages: As mentioned earlier, distribution matters too
- Neglecting the customer journey: Initial deal size often differs from expansion revenue
Conclusion
Calculating average deal size by segment transforms a simple metric into a powerful strategic tool. This detailed view of your revenue streams enables data-driven decisions about resource allocation, sales strategy, and product development.
By implementing regular segment analysis of deal size, combined with other key metrics like CAC and retention rates, you'll gain a comprehensive understanding of where your business creates the most value—and where opportunities for growth exist.
Start with clearly defined segments, maintain consistent data practices, and revisit your analysis quarterly to ensure your go-to-market strategy remains aligned with the segments that drive sustainable growth for your SaaS business.