What is sales velocity?Simply put, sales velocity is a marketing and sales metric used to measure the speed at which opportunities and leads turn into revenue, month over month. While normal velocity can be described as “miles-per-hour”, sales velocity represents “revenue-per-month”. Calculating sales velocity is one of the most illuminating ways of seeing how fast your sales team is making money and which levers need to be pulled to accelerate the speed. There are 4 main factors that significantly impact how much you sell:
- the number of leads,
- the average deal size,
- your conversion rate,
- the length of your sales cycle.
The 4 sales velocity variables and how to calculate themThe formula for calculating sales velocity is pretty straightforward: multiply the number of leads (#) by your average deal size ($) and your win/conversion rate (%), then divide the result by the length of your sales cycle (average conversion time). The number of leads (#). This is simply the number of leads your sales team works over a period of time. The number of new leads in your pipeline is directly influenced by the efforts of your marketing team and other lead generation tactics (lead nurturing, referrals, etc.). Average deal size ($). Also known as Average Purchase Value or Average Customer Lifetime Value in subscription-based business models, average deal size is a metric that refers to the average selling price per closed deals over a set period of time. Win/conversion rate (%). Conversion rate refers to the percentage of leads that convert into paying customers over a set period of time. You can calculate your conversion rate by simply taking the total number of conversions over a set period of time and dividing that by the total number of leads over the same period. The length of the sales cycle. It can also be referred to as the average conversion time. This metric measures the amount of time from the first touch point with a prospect to conversion averaged across all won deals. It is typically measured in months. It is important to understand that these 4 variables have a significant impact on sales velocity in general but are also interdependent, meaning that changing one variable will most likely affect the others too. For example, increasing your prices can lead to higher Average Deal Size but lower Conversion rate because fewer people will be prepared to spend more. Another critical thing to take into account when calculating sales velocity variables is consistency. There are different ways you can go about measuring these metrics, but once you decide on it, it’s key to always stick to the same formula. For instance, if you measure the average length of your sales cycle from the moment the lead is qualified, then use this same method every time you calculate sales velocity. It will help you maintain a good level of consistency and avoid unnecessary confusion in the future.
Why you shouldn’t focus only on adding new opportunities to your pipelineIt’s not uncommon for sales teams to focus entirely on lead generation in hopes of accelerating sales velocity. When you think about it, filling the pipeline with more opportunities to win more business does sound like a logical way forward. However, if we assign the same values to all variables, then it is possible to increase sales velocity quite significantly even without increasing the number of opportunities. A very common scenario among budding start-ups would be something like that: when preparing for an investment round, they’d concentrate all their efforts on generating more leads/opportunities in the hopes of achieving consistent growth of their MRR over six months or so. The growth ambition of 50% would be a typical target. If the plan didn’t work out, they’d blame marketing for it. But why not try to increase the average deal size, improve the conversion rate or shorten the sales cycle? A lot can be achieved simply by creating obvious upsells, value-add extras and product bundles, focusing on high-velocity customer segments or adopting a more consultative closing technique, or shortening your trial offer. Focusing only on adding new opportunities is not the best strategy, mostly because ramping up lead generation efforts eats into resources and leaves less time for other variables. Essentially, it’s simple maths – if there are four equally important variables in one equation and you’re dedicating all resources to improving only one of them, the result must be outstanding to make a significant impact. Measuring sales velocity can give you a unique insight into those sales and marketing processes that either drive acceleration or dampen your sales growth potential. And to get an even clearer picture, you can try measuring it across different customer cohorts.
To get the most out of sales velocity, measure it across different customer cohortsSince there are different levers directly influencing the speed of your pipeline, it is good practice to look at various data to get fresh perspectives on sales velocity. Open, Won, and Lost Every successful business makes pipeline analysis one of their key priorities. Understanding how leads progress in your sales funnel and why some deals are won while others are lost can give your sales team a one-of-a-kind insight into parts of their processes that need improvement. If you take your won deals as a benchmark for measuring sales velocity, you will quickly be able to form and test various hypotheses that can lead to improving it. Questions that often arise when analyzing Open, Won, and Lost deals can include:
- At what stage do we lose most of our deals?
- How likely are we to close a deal if a lead spends this much at this stage?
- Do Won deals have certain characteristics in common that could make them easier to recognize at this stage?
- Do we know our red flags for each stage of the funnel? What is average for us and how far over average can an opportunity go before we deem it Lost?