Breaking down average deal size - are bigger deals always better?
This article is part of a six part series written by Ryan Russell at HTN sharing his learnings on employer sales. Click the links to jump to any of the other articles in the series:
In this installment of our series on Sales Velocity, let’s look at Average Deal Size of an employer sale. This metrics has two components:
We will focus more on Quantity in this section given the type of pricing offered, especially in the early growth stages of a business, relates heavily to win rate % and is a function of what the market requires. For more details on pricing strategies, check out the Win Rate section.
In terms of isolating average deal size as a single variable in the equation, the answer would be yes. But it’s a common mistake to think that bigger is better here for digital health vendors. Especially early on, the different sized companies have vastly different requirements throughout the sales process and your ability to appeal to those requirements will impact win rate. It ultimately comes down to finding the niche to start with based on which audience your value prop will most resonate with.
There are companies that are much better suited to selling innovative, but simple and standardized products to small to mid-market employers. This approach means that volume through brokers or other more localized means becomes more important.
Others appeal to really big, broad populations that can absorb customizations and demands that come with larger employers. Picking a niche (at least to start) will serve you well.
Let’s take a few examples of vendors and the types of employers they are appealing to:
Larger employer targets:
Many companies will feel a natural tension to try to sell across segment sizes but the tradeoff can put a strain on both core competencies, organizational resources, and your team’s focus. The differences in selling to these different segments also have a significant impact on roll out strategy as well as who you hire and how you incentivize that team.
Segmenting your market can help you to internally hypothesize which employer segments your value prop will most resonate with by thinking about the factors that will be important across different sizes, industries, employee types, profit profiles, etc. It will also help to organize your marketing outreach efforts if you have prioritized lists of companies and/or markets.
You don’t need a super fancy model or vast amounts of data to get started on this segmentation exercise. Here are two ways to get started:
Once you have a broader list of companies, start looking at publicly available data – for larger, public companies, what do profit margins look like and how important will cost be? What companies are pushing new boundaries in health and benefits? For smaller companies, what industries have specific employee types that you will resonate with the most?
Once you have your target list based on where you think your value prop will resonate, go back to the number of Qualified Leads article. Leverage those partnerships and/or share that list with marketing to generate those leads, then ask the right questions to these segmented leads early in the sales process. This will help to see what segments you resonate with most. This takes time but thoughtful planning can save a whole lot of churn and energy spent on markets/companies that shouldn’t really be targeted at your particular stage of growth.
Some of you will say, “but I’m just getting started and have no idea who I’ll resonate with so I need to talk to as many people as possible.” You’re right, you will likely need to talk to a lot of people. But you then need to prioritize your time spent because you only have so much of it to fill in the sales cycle that exists in this space (see the Sales Cycle article).
Better to be thoughtful – again, put yourself in the shoes of the buyer and think, who is this really solving an urgent problem for and create a plan to test around that. The quicker you can test and learn what is resonating and with who, the better.
The quantity in average deal size is also a function of rollout strategy and time. As we discussed in the Employer Primer, employer size plays a massive role in both. With smaller employers, there is less appetite to test products with sub-populations of employees before rolling them out to the full population. However, with larger employers a pilot can be a valuable, if not a necessary, strategy to land and expand over time. To demonstrate this interaction of time and roll-out strategy depending on employer size, we’ve overlaid an illustration on an employer size chart from Statista.
There are some good articles on how to avoid “Death by Pilot” but in summary, when you are an early stage startup trying to gather data, logos and make a name for yourself, it can be a good way to get your foot in the door. However, as you build credibility over time, pilots can start to become a waste of time for both you and the employer. From an employer perspective, they may have to double the amount of work just to cater the marketing and implementation efforts differently to two populations. On the other hand, from your perspective, if you are being offered a “prove it” pilot to 1,000 people in a population of 75,000 employees, that effort may very well be worth it.
Just make sure you are evaluating the impact on velocity over time as this decision will impact average deal size (smaller size with pilots), win rate (more logo momentum) and average sales cycle length (longer cycles to go from pilot to full rollout sale).
As you think about building out your sales team, this is where targeting a specific type of employer customer can help you in deciding how to build out the team.
Large employers typically have many stakeholders, rely on lots of data, and need change management help throughout the process. Obviously hiring someone with a bunch of trusted relationships is a great move. If you can pluck someone senior from the Mercer’s, Aon’s or Willis Towers Watson’s of the world who has established relationships with employers, that can be a huge leg up. But what if you don’t have those connections or are struggling to find someone willing to take the risk jumping into a start-up? This is where customer segmentation matters, as the answer depends on the type of employer you’re targeting.
If you’re targeting sales to large employers, think about who you want leading those long, complicated sales efforts. Empathetic, soon to be ex-consultants (meaning non-benefits consultants, i.e. the McKinsey’s, Bain’s, BCG’s, Deloitte’s of the world) who live and breathe stakeholder management processes through data driven approaches fit the bill here. Or what about someone working for an employer benefits team who is looking for a new, innovative challenge that has actually sat in the seats of these buyers and brought ideas forward to leadership?
Smaller employers typically have more personal relationships with their employees and operate largely through brokers, which can require a bit of a different skill set. Who is the person that can speak their language, wants to host local events, can develop deeper relationships with local/regional brokers, and think creatively about different partnerships? Up and comers from these brokerages who know what makes the employers tick, understand the incentive models and know how to make the brokers look good can make strong candidates. Sales or partnership folks at larger insurers who have relationships or understand the broker market in certain regions well. Or what about a smart med device or pharma rep who can apply similar frameworks but wants out of the Doctor’s office?
Going back to the “Partnerships” section of the Qualified Leads article, you can also think about external relationships to augment your internal teams. Nice Healthcare is a good example of creating a distribution partner by entering in an agreement with Agility Innovation Partners to drive growth in new markets through the relationships it has with broker networks.
As you’re building out your team / strategy, you need to be thoughtful about how you are compensating for success. For example, say your company is looking to bring in larger employers, and you get stuck in a typical sales cycle: a 100,000 employee customer wants to pilot with 1,000 employees. From that, you get 10% utilization, or 100 employees using your solution.
While that may be a massive win for the company as a whole (think of all the VC funding knocking on your company’s door from that logo on a slide!), if you incentivize your sales team by the number of employees that sign up in year 1, you’ve created a misalignment of incentives in your organization.
That salesperson, who just brought in a major customer that could be poised to grow significantly over the next 5 years, is incentivized to be twice as happy selling a 2,000 employee company without a pilot where they can enroll 10% of the entire company, 200 employees, in year 1. This sort of incentive misalignment only creates frustration and churn over time, both with your employees and your customers.
Asking a few key strategic questions can help define what your needs are for your sales organization:
By clarifying the answers to these questions, you can build better alignment throughout the organization.
There are startups that price based on total eligible employees and those that price based on employee enrollment and/or utilization of a benefit. If your pricing strategy is the latter (which we talk more about in the Win Rate section), then your average deal size is affected by the number of people enrolling in or using your benefit.
This is another topic that could warrant a separate article for itself. All too often, digital health players win deals with employers and end up projecting substantially higher uptake rates than what actually materializes. This is not just an issue smaller startups face, even big players perpetually do this as well. Let's take a look at a few examples of the challenges that can occur in enrolling employees in benefits that are offered:
Setting yourself up for success to drive enrollment often happens before the sale is even completed, which is an internal, cross-functional feat. You need to account for the needs of multiple stakeholders within your organization, so they can be set up for success in enrolling employees:
It’s always important to remember that the employer benefits and marketing teams are busy so the more help and resources you can offer up, the more likely they are to implement your ideas (with some exceptions).
There are a number of ways you can set up your organization for success in terms of enrolling employees in your benefit after an employer agrees to offer it:
Things you can do inside your organization as a vendor:
Things that you can do with your employer customer (& their employees):
Employers - have limited time/resources and need to coordinate across all other benefit offering campaigns. Some ideas for how to make life easier for them:
Employees - have limited attention spans and a lot of information to consume, so make it easy for them to do so by:
Collective Health is an example of a company that has both taken the creative onus off employers and leveraged word of mouth with employees very well. Check out this article about Box’s experience with Collective’s Open Enrollment:
And when it came time to get Box employees—fondly referred to as “Boxers” at the company—engaged during Open Enrollment, Collective Health hosted a handful of curated events to deliver Boxers their benefits information in an accessible, easy-to-understand way. With several Collective Health ambassadors on hand for events ranging from a gelato stand to a puppy adoption pop-up, Kramer felt confident that Boxers got the answers they needed to their benefits questions.
Yes, you read that right, Collective hosted events including a puppy adoption pop-up. What do puppies have to do with healthcare benefits? Nothing at all. But what better way to make a positive emotional connection than with puppies? It’s a great way to start the conversation and build awareness with employees.
Taking these tactics can help avoid the common trap of winning the business with an employer only to lose by not enrolling a meaningful number of employees. There is nothing worse than a disappointed employer after you predict substantially more employee engagement than actually materializes (and spend an incredible amount of your organization’s time doing so). Being thoughtful about how you attract employees can make all the difference.
The impact that average sale size has on velocity is more complicated than just maximizing the number. Understanding the customers - both the employers and the employees - that you will resonate with most may mean you proactively choosing smaller vs. bigger.
Finding an average deal size that works well with the rest of your sales strategy is a key ingredient in maximizing your sales velocity equation - if you’re targeting the wrong deal size for your organization, it negatively impacts all of the other key metrics in the equation.
Now let’s move to the next key metric in the sales velocity equation, your Win Rate.
Jump to other articles in the series: