It's all about the size. Why you need to know your Average Deal Size

So far, we’ve covered two critical components of MSP unit economics: WTF are Unit Economics? and The CAC Trap: Why Customer Acquisition Costs Can Make or Break Your MSP Business. If you haven’t read these yet, we highly recommend going back and checking them out—they set the foundation for understanding why your MSP business needs to focus on more than just growth. Today, let’s move onto a metric that often gets less attention but can make all the difference: Average Deal Size.

Let’s face it—knowing how much it costs to acquire a customer is crucial, but wouldn’t it be nice to know what they’re actually worth? That’s where Average Deal Size comes in. It’s more than just a number—it’s a compass guiding your sales strategy, profitability, and long-term growth. But what exactly is Average Deal Size, and how can MSPs use it to their advantage?

What is Average Deal Size, Anyway?

Let’s start with the basics: Average Deal Size is the average amount of money your customers spend on your services per deal or contract. Simple, right? Here’s the formula in its most basic form:

Average Deal Size = Total Revenue from Closed Deals ÷ Number of Closed Deals

For example, if you’ve closed 10 deals in the last quarter, and they’ve generated $200,000 in revenue, your Average Deal Size is $20,000.

This might seem straightforward, but don’t let the simplicity fool you! Understanding and optimizing your Average Deal Size is like unlocking a cheat code for your MSP business. It tells you if you’re upselling effectively, if your service packages are appealing, and if your pricing strategy aligns with the market.

Why Average Deal Size Matters to MSPs

Imagine this: You’ve successfully closed a few deals, your marketing campaigns are driving traffic, and things seem to be running smoothly. But here’s the kicker: are you really making enough money from each deal to sustain your business?

Here’s why Average Deal Size should be on your radar:

1. Revenue Growth: Larger deals mean bigger revenue, and bigger revenue means better growth opportunities. As N-able notes in their blog on KPIs for MSPs, tracking Average Deal Size helps MSPs identify high-value clients and services that contribute the most to their bottom line. If your Average Deal Size is increasing, it’s a good sign that you’re upselling more effectively, bundling services strategically, or targeting more lucrative clients.

2. Improved Sales Strategy: Knowing your Average Deal Size can help you tailor your sales process. Are you pushing for high-ticket clients, or are you focusing on smaller contracts? According to NinjaOne, understanding your sales data allows you to create a sales process that’s both repeatable and scalable. This is where the right pricing strategy comes into play—if your Average Deal Size isn’t growing, maybe it’s time to reassess how you’re pitching and bundling your services.

3. CAC Recovery: Here’s a little MSP math for you: the higher your Average Deal Size, the faster you recover your Customer Acquisition Costs (CAC). Remember that hefty $32,000 CAC we talked about in the last blog? If your Average Deal Size is $1,000, it takes forever to recoup those costs. But if your Average Deal Size jumps to $5,000, you can breathe a little easier. As Salesforce highlights in their article, increasing deal size means you’re getting a higher return on the time, effort, and money spent acquiring each customer.

The Impact of Average Deal Size on Profitability

Let’s dig deeper into profitability. You might be closing a lot of deals, but if your Average Deal Size is too low, you’re leaving money on the table—and worse, you’re working harder for less.

According to Channel Futures, MSPs are off to a strong revenue start in 2024, but there’s still a gap in maximizing deal size. Why? Many MSPs focus too much on client volume instead of the value of each deal. Closing smaller deals may feel like a win in the short term, but it can actually hurt your business over time. Smaller deals usually come with lower margins, less opportunity for upselling, and more customer churn. Plus, it takes more small deals to generate the same amount of revenue as a few larger ones.

The bottom line? Bigger deals = bigger profits. Period.

Calculating Your Ideal Average Deal Size

Now that we’ve established why Average Deal Size matters, the next logical question is: how do you calculate the ideal number for your business?

While every MSP is different, here’s a quick method to get a ballpark figure:

1. Calculate your Total Monthly Overhead (all your expenses, including salaries, tools, and rent).
2. Add your Target Profit Margin (for most MSPs, this is typically around 20-30%).
3. Now, divide that number by your Expected Monthly Client Count.

The result? The minimum Average Deal Size you need to maintain profitability. Anything above that is gravy—and if you’re not hitting that number, it’s time to rethink your pricing or sales strategy.

How to Boost Your Average Deal Size

Okay, so you’ve crunched the numbers, and maybe your Average Deal Size isn’t quite where you’d like it to be. Don’t panic—there are ways to give it a healthy boost:

1. Offer Premium Services: Instead of focusing on basic IT services, consider offering high-value solutions like 24/7 SOC monitoring or advanced cybersecurity packages. Partnering with vendors and offering specialized services, as Canalys notes, is becoming a growing trend in the MSP space. By adding more premium options to your menu, you can justify a higher price point, which will naturally boost your deal size.

2. Bundle Your Services: Bundling isn’t just for cable TV companies. Packaging your services together can make your offerings more attractive while increasing the overall deal size. For example, instead of selling monitoring services and data backup separately, bundle them into one comprehensive package at a slight discount. Clients are more likely to say yes to bundled services, and you’ll increase your Average Deal Size in the process.

3. Focus on Long-Term Contracts: Locking clients into longer contracts can stabilize revenue and reduce churn, which will improve your Average Deal Size over time. Longer contracts also give you more leverage for upselling premium services or renegotiating prices down the line.

4. Upsell and Cross-Sell: The art of upselling and cross-selling can’t be overlooked. As NinjaOne mentions in their blog on MSP sales strategies, this can be one of the easiest ways to increase your Average Deal Size. Whether it’s offering complementary services or upgrading clients to a more advanced package, the key is to always have an upsell or cross-sell option available.

Final Thoughts: Why Average Deal Size is a Game Changer

It’s easy to get caught up in the excitement of closing deals, but if you’re not paying attention to your Average Deal Size, you’re leaving money on the table. Understanding this crucial metric can help you refine your sales process, recover your CAC faster, and boost your profitability. So, take a hard look at your Average Deal Size today, and ask yourself: Are you selling small to win big, or are you ready to make each deal count?

This is just the beginning. In upcoming blogs, we’ll dive into more key metrics that every MSP needs to master: Gross Margin, Gross Profit, Payback Period, and Retention Rate. These metrics will help you understand how well your business is performing and, more importantly, how sustainable that growth really is. Stay tuned because cracking the code on these numbers is how you go from surviving to thriving in the MSP world.

If you haven’t checked out the previous posts in this series—WTF are Unit Economics? and The CAC Trap—now’s the perfect time to get caught up. Understanding unit economics is the key to mastering your MSP business. And mastering your Average Deal Size? That’s how you level up.