Can you confidently tell me how much revenue you expect to gain from new user acquisition in this month?
Many business owners and sales managers can’t…
Sales velocity is a metric created to help businesses in situations such as this one. In this article, I’ll go over the concept, explaining what sales velocity is and how it’s calculated; while also giving you a few tips on improving it.
What is Sales Velocity?
Sales velocity is a measurement of how quickly your business is making money. You can measure your company’s sales velocity by looking at how quickly the deals are moving through your pipeline and generate revenue. This will give you a better idea of how much money you can expect to make in one day or over a certain period. Knowing and understanding your sales velocity will allow you to better understand what type of business strategy to put in place for maximum profit potential.
Sales Velocity Formula
Number of Opportunities * Average Deal Value * Win Rate / Length of Average Sales Cycle
A quick note before examining the variables in this formula:
When it comes to measuring sales velocity, many companies will take the extra step of separating their pipelines by small, mid-market and enterprise companies. This way, they can see what size is the best fit for their business and work on strategies to spice up those groups that are struggling.
While it’s important to measure sales velocity, this single calculation can’t reveal the true and overall health of your entire business. All these numbers need to be put into context before you can get a sense of how things are going in your company.
A best practice for measuring sales velocity is to do it regularly and compare the past and present results. This is especially important after the changes in strategy or marketing techniques have been made by your business because without this comparison, there will be no way of knowing if they have been effective or not.
Now, let’s examine each of the variables in detail:
The Four Variables of Sales Velocity
The sales velocity metric is a key way to measure the effectiveness of your team’s performance, both now and in the future. Tracking this metric can open up new opportunities for optimizing your process and achieving greater success.
Sales seem like a straightforward subject, but the small nuances make it difficult to fully comprehend how all of these factors play into one another when measuring sales velocity.
The four metrics that are key to understanding sales velocity are:
- the number of opportunities in the pipeline
- the average size of each deal closed by reps
- how often reps are closing won deals
- the length of your sales cycle.
These four metrics should be tracked as frequently as possible because they explain why some teams succeed while others fail, what actions need more attention from management, which leads will generate revenue if pursued, or where you may have an opportunity to shorten the cycles with clients who have already been waiting for your product too long.
Let’s take a closer look at these four variables:
1- Number of Opportunities
Within your sales pipeline, you are going to have a certain number of opportunities.
At this stage in the game, an opportunity is also known as a qualified lead – meaning that it’s worth spending time on it and potentially converting it into an actual lead. The number of opportunities in your pipeline can be found by simply counting how many leads have been qualified as worth pursuing within the specified time frame.
2- Conversion Rate
Your conversion rate can be thought of as the percentage of prospects that make it down your pipeline and become a paying customer.
For example, if you receive 100 leads in a month and 12 are converted to customers, your conversion rate is 12%. Similarly, if you have 20 potential clients who ask for more information on an offer, but only 4 who follow through with the payment, your conversion rate is 20%. It’s important to keep tabs on this number because it reflects how well qualified your leads are.
If there’s not much movement at first, but then suddenly there’s a significant shift in one direction or another, take time to investigate why. It could indicate that people aren’t buying from you because they don’t like what they’re being offered or maybe they just don’t trust you yet.
A high conversion rate can also show the success of your current approach to selling – if conversions occur quickly after the contact, it seems that prospecting for new sales may need some work.
3- Your Average Deal Size
A company’s average deal size is the only factor of sales velocity that directly correlates to money, and therefore, it should be an important metric for any business owner.
Knowing how much a customer will spend helps them forecast revenue from new customers, as well as gauge their ROI from existing clients.
Businesses need to consider a balance between the cost of new customer acquisition and profit. For this model to work there needs to be enough revenue being generated by customers that outweighs the costs of getting them in the first place. If it doesn’t, profits will suffer because these expenses can’t fully be recovered from sales alone.
If you want your business to thrive, then you need to find a way to generate more money without spending too much on acquisition marketing.
When it’s time to calculate your company’s average deal size, make sure you designate the period and divide the total amount generated by the number of deals in that frame.
For example, if you’ve had a couple of months with extremely high-value deals but more months with lower-value contracts, this will change your average deal size calculation. It may seem an easy task to simply calculate your company’s average deal size – just divide the total amount generated by the number of deals during a certain timeframe! But don’t forget about those pesky outliers; one or two insanely large contracts can significantly skew these numbers upwards even when most are smaller in value.
So be sure to consider both when dividing out averages so that you can get a clearer picture of what is going on at any given moment for your operation.
4- Length of Sales Cycle
This is the only sales factor you don’t want to increase.
The Length of Sales Cycle basically refers to how long it takes a customer to move through the pipeline and convert.
Creating a more efficient sales process, redefining your playbook, and sometimes adding headcount to your team are all ways to shorten your average sales cycle and close more quality deals faster.
How to increase Sales Velocity
As we have said, four factors affect a business’s sales velocity: opportunities, average deal size, win rate, and sales cycle. If you improve each of these factors, your sales velocity will increase.
Let’s see how you can improve each of them.
1- Increase number of opportunities
One way to boost your sales velocity is by increasing the number of opportunities in your pipeline. The more opportunities you have, the faster you make money…
To increase your pipeline, focus on the quality of leads rather than quantity. Instead of sending out as many leads as possible, look for high-quality prospects that are more likely to convert into customers.
Don’t get discouraged if you don’t make a sale right away.
Rather, maintain the realistic expectations of what type of business solution works best for your company and continue building up relationships with these types of companies.
2- Boost average deal size
Boosting your average deal size all comes down to accurately connecting what value means to customers with a price they’re willing and able to spend.
Selling is not about you. It’s about your customers and what they need.
When their needs are fulfilled, your quota will fill itself.
Tailoring your sales pitch is just one way to help you stand out from the competition. Selling should be an extension of customer service, not a hard sale that doesn’t address their needs and concerns.
Also, remember that time is precious, and don’t rush any of your clients through the process. You want them all to be satisfied with their experience with you. But spend more time and energy on larger opportunities with bigger companies if that’s what will make a difference for you in the long run.
If you’re able to close your smaller deals faster, then use these extra hours or days that these particular jobs are taking up (and getting paid for) to dedicate more time and energy to closing larger deals as well, they’ll pay off sooner or later!
And lastly, relationships.
Building relationships with customers is an important step in the sales process. Creating and nurturing close connections will help you get more out of your average deal size.
3- Optimize conversions
Did you know that someone who doesn’t buy from you could be doing it for several reasons?
Maybe they found another company with what they wanted or your service isn’t the best choice for their needs or budget.
Whatever the reason, if you want to increase your sales and profits, you need to figure out why people are exiting your pipeline, therefore, take appropriate action. You might think that you have a great product and service, but it doesn’t matter if the customer does not understand how your solution will help them solve their problem.
Make sure to conduct a deep sales discovery to get insight into what the customer is seeking so that you can present your business as an answer. Match all of their needs with one of our attributes and emphasize the dangers of inaction or solution benefits.
Remember that your sales process and the buyer journey are so closely related, it’s hard to tell where one starts and the other ends.
Don’t worry about trying to predict what a customer will do next–those predictions are often inaccurate. Instead, focus on being patient with customers as they make their way through the journey to making a buying decision.
4- Shorten the length of the sales cycle
Selling to customers is one of the most important parts of any sales job.
Understanding that every customer and business will be different can help you better know how to approach them. Some customers will need a lot more convincing, while others may make decisions faster or at an earlier stage than others.
When a customer reaches out to you, avoid being slow to respond. If they are qualified leads and need information from you right away, make it your priority to help them as soon as possible. When the lead is further along in the sales process and wants more information about their objections, make sure to get back to them ASAP so that both of you can move forward.
Another way to shorten your sales cycle is by always having relevant content ready. Blogs, how-to guides, and product overviews should all be accessible so that customers can find the information they need without waiting for a response back and forth.
This strategy will save time as you avoid going back and forth with questions/answers from customers. Not only do you save time, but you also allow your customer to get their answer faster which is important in the fast-paced world we live in today.
As a business, your sales velocity speaks directly to its success.
If you’re efficiently moving prospects through the pipeline and converting them into closed-won deals, you’re going to have a higher sales velocity. The faster you sell the better.
So, make sure you pay close attention to sales velocity and the four factors that affect it.
It’s not always easy to determine what will make your sales velocity spike. But, once you know, the sky is the limit, and success isn’t far-off.
Frequently Asked Questions
How can I calculate sales velocity?
To calculate sales velocity, multiply the number of opportunities, average deal value, and win rate altogether, and then divide this number by the length of your average sales cycle.Although it differs according to industry, location, and company; account managers get paid better than customer success managers simply because it’s sales and there are incentives for being successful.
What does Velocity mean in business?
Sales velocity is a measurement of how quickly your business is making money.
What is Sales Pipeline Velocity?
In the case of a pipeline, the equation is:
The number of sales-qualified leads in your pipeline times the overall win rate percentage of your sales team times the average deal size (in dollars) divided by your current sales cycle in days.