Performance Management Friday — Average Transaction Value

Over the past few weeks, I’ve focused on various pipeline/funnel metrics that sales people should consider in assessing their own productivity.  In the post, Ideal Pipeline Volume, I talked about Average Transaction Value as a key performance indicator.  I want to dive into this more deeply.

Just for a quick review, three of the greatest levers in hitting your goals are:  Increasing Your Win Rate, Reducing Sales Cycle, and Increasing Average Transaction Value.  Of these three, perhaps the easiest to achieve is increasing the average transaction value.

Too often we defeat ourselves and our ability to achieve our numbers.  Every discount we give, every price reduction we make, every concession we make in pricing, means we have to sell more.   It means we have to prospect more opportunities, chase and close more deals.  If we can maintain our pricing levels, avoiding discounting, we make our job easier–we don’t have to find those additional deals.

The math is easy.  If we disount 10%, then for every 10 deals, we actually have to close 2 additional deals to make our number (for those of you that say 1–do the math.  One additional deal still has you missing the number.  If your average transaction value falls even lower, you have to close that many more deals.

Take some time and look at the deals you’ve done over the past 12-18 months.  How often did you have to discount substantially?  If you could have avoided discounting, would you have overachieved your goals?  Would you have been closer to making your number?  Would you have had to close few deals?  Would you have earned more in commissions.

Be selfish for a moment.  Imagine an environment where you didn’t have to discount, where you could constantly sell high price, high value deals.  What impact would it have on how you spent your time?  What impact would it have on your performance and your ability to reach the number?

“Now Dave, you just don’t understand it, customers are demanding discounts, we have to do it.”

There is no doubt, pricing is an issue, we have to be competitive, to win, we sometimes have to offer discounts and concessions.  But I think we do it to ourselves first-then our customers negotiate us to even lower points.

Too often, I get prospecting emails or sales calls that start with “We can give you a deal, we can discount, we have a promotion, we’ll give you something for free.”  Before I can even initiate a discussion on pricing, sales people are talking about doing a deal.  Our initial approaches focus the customer on price, our approaches  lay the groundwork that everything is negotiable and that they should negotiate even further.

While is sound trite, customers don’t really care about price–unless we make that the issue.  Customers care about value!  If we aren’t positioning our value appropriately–then the only basis customers have for evaluating our value is our price.  

I need to repeat that, if we don’t establish a framework focusing on value—regardless how our competitors position themselves, then the only basis the customer has for evaluating our value is what they think of themselves or our pricing.  We owe it to our customers to help them understand and evaluate alternatives based on value.

Take a simple example.  Whenever I buy something—let’s say I need a new laptop, there are a lot that can do the job, all roughly in the same price range.  I weigh a whole bunch of things in determining which one I buy–past history with a vendor’s products, reputation, reviews, hassle factor.  I buy the one that presents me the greatest value, but may not be the cheapest.  Think back to purchases you make–I know of very few people that purchase solely on price–they purchase on a perceived value.  It’s our job to understand what they value, and to position our solutions to be perceived as the highest value.

If we do this–we have a greater opportunity to maintain our pricing–to keep a high average transaction value.

There are other ways to increase average transaction value.  If you sell products, you might bundle a more comprehensive solution for the customer.  Going back to my laptop example, I always add memory and disk–increasing the transaction value.  Likewise if you sell services, you can bundle services or solve a bigger problem. 

You can also spend more time with customers that buy more.  I have a client that focuses on businesses of a certain size.  They do very well in maximizing the value and price they get from each sale.  It would be difficult to increase their average transaction value in their current customer set.  But we wanted a way to raise the average transaction value.  With a little thinking, the answer became obvious, “what if we go after much bigger customers?  They have the need and ability to consume more of the services we offer.”  We’ve put in place a strategy to shift much of their business to a different customer set–raising the average transaction value, with virtually no increase in selling expense.

When you start thinking about it, there are all sorts of ways we can maintain or increase our average transaction value.   But we can’t start by digging a hole for ourselves.  The sales discussion should never start with pricing, we should never open a sales initiative positoning discounting and dealmaking.  We must always focus on value.

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