Are bigger B2B deals worth the extra effort?
Are you better off pursuing mega deals or smaller opportunities? Ask that question of sales leaders and you will get a lot of opinions. Now imagine spending half of your revenue based on an opinion about the answer to that question. Are you comfortable with that?
Half you ask? Where did that come from? Well in our study of public B2B software companies, we found that the average enterprise spent 48% of their revenue on sales and marketing operations. In the $100M – $500M revenue range the figure is 60% of revenue. If you are headquartered on the west coast, expect to spend 70% of revenue.
Back to our question. How do you know if big deals are worth pursuing compared to smaller ones? There are of course two competing lines of reasoning:
Bigger deals are harder to close but their extra financial return make them the best way to grow the business.
Smaller deals give us a faster return on our investment and make them the best way to grow the business.
So, which one is right? If you don’t know then you can fret over the decision. But before you spend too much energy puzzling that out, let’s challenge the premise of the question and consider a third possibility:
Bigger deals are easier to close and worth more.
Counterintuitive as that sounds, we’ve seen that more often then not. We specialize in analyzing CRM data to answer this question (among others). You don’t have to guess. There is a factual answer.
Before we get into the details, let’s just review… As simple as it sounds, computing win rates is not straightforward. There are four problems:
How do you account for time Do you count an opportunity you have been working on for 6 months as equivalent to one you have been working for 6 days? The common approach here is to ignore time. But it makes no sense to say you win some percent of your opportunities unless you also say how long it takes.
How do you include open opportunities for which you don’t know the outcome? How much of your current sales funnel is open? All of it. The common approach here is to just exclude open opps from the historical analysis. And omitting open opportunities from your analysis is fine—if you don’t have to work on them.
Once you decide that time and including open opportunities is important, how do you account for the changing number of “worked opportunities” in your denominator?
When do you start counting from? Do you want to know the win-rate starting from first call, discovery, demonstration, or from contract negotiations? Kind of important.
Back to our question. Are bigger deals easier or harder to close? We measure empirical win-rates taking all the above and more into account. Win-rates, as shown in the sample below, are curves that show the proportion won as a function of time and stage.
But where this really gets interesting is when we look at win rates stratified by deal size. In the case below, the customer segments their business by customer size: Small businesses and Medium/Large businesses (as measured the prospects’ revenue—for this customer, this is a good proxy for deal size). The set of curves show the empirical win-rates of opportunities in each category and all opportunities combined.
Well look at that… the Medium/Large deals lead the race from the start. For this sales organization, they win a higher proportion of Medium/Large deals than smaller ones. That was unexpected.
Let’s see that happens when we factor deal size into the analysis (below). Since we are looking at the ASP-weighted win-rates, the vertical axis now shows the expected value of a new opportunity. This chart really highlights the difference. One year after starting an opportunity, these bigger deals are adding value to the business at about 4x the rate of smaller opportunities.
So, are bigger deals easier to close? Well, your mileage may vary. But don’t be surprised if they are—hands down—the fastest way to grow your business.
More important, there is nothing special about big vs. small deals. You could ask the same question about geographies, product lines, sales teams, or any other meaningful segmentation of your business. What are the win-rates for new opportunities in each segment, and when weighted by ASP and margin, which segments offer the most efficient way to scale your business?