Last updated on January 11th, 2024 at 11:00 am
Many sales leaders find it quite overwhelming to keep track of multiple KPIs while managing their pipeline. Some of the obvious ones are booking, pipeline, forecast, deal size, transaction volume, etc.
What if you had the time to track only one? Which one of these is the most important?
While engaging with customers, we found that many business leaders were not familiar with the numerical calculation and the implication of measuring “Sales Velocity”. However, most refer to the term “sales traction” in their discussions. They know that it is an important characteristic that defines world-class sales organizations.
The concept of sales velocity removes the subjectivity in this term traction. It offers an accurate metric that is numerically derived to help you improve business parameters that matter the most.
It is important to track Sales Velocity. If measured and improved diligently, this one metric has the power to transform your organization; and help you win over your competition.
Why should you measure Sales Velocity?
Management guru Peter Drucker said that – “you can’t improve what you can’t measure”. This is the philosophy of any transformation initiative that relies on measuring certain parameters and then improving them based on specific actions.
Sales velocity is probably the most powerful sales metric that reveals the most about time and money! It determines sales traction in-terms of effectiveness and health of the business.
So if you as a business leader need to improve traction, it is imperative that you measure sales velocity regularly and then arrive at the steps to improve.
What is Sales Velocity?
We know that velocity is a measure of how quickly an object moves over a period of time.
Similarly, in this context, the simplest definition of sales velocity is how quickly deals move through the pipeline or funnel. In a way, it measures the average revenue that gets generated by a company in a day.
How can one measure Sales Velocity?
Velocity in the context of speed of a cyclist depends on factors like gradient, weight, wind speed etc. Similarly, sales velocity (SV) is determined by following four variables or factors: number of qualified opportunities (O), average deal value or average deal size (V), win-rate percentage (R) and length of sales cycle in days (L). It is a good idea to have a sales CRM that tracks these factors while your teams are updating their opportunities and pipeline.
Sales Velocity = Number of Opportunities x Deal Value x Win Rate / Length of Sales Cycle
Sales Velocity formula is
SV = O x V x R / L
Let’s say your business has 20 qualified opportunities, average deal value of $ 100,000 USD, win-rate of 25% with a sales cycle of 60 days. So the calculation would be:
Sales Velocity = (20 x 100,000 x 25%) / 60 = $ 8333.34 USD per day
This means that your business is generating roughly $ 8333.34 USD each day. Now, your endeavor should be to increase this by either increasing the variables in the numerator of by reducing the denominator – or both if possible.
What are the factors that determine Sales Velocity?
By now, hope you agree that measuring sales velocity is pivotal to assess the overall health of your business. A higher sales velocity means you are generating more revenue in less time. Measuring sales velocity over time will also help you to benchmark sales performance and compare sales team effectiveness.
However, the metric alone could appear very random. Along with this numerical calculation, it is recommended that you analyze all the factors responsible for it in a comprehensive way and study how the changes could impact this calculation.
For some reason, most sales teams focus only on getting more opportunities and they tend to ignore the rest. Instead, you should encourage your team to optimize all levers to maximize the return from their opportunities.
Let us look at the four factors that impacts sales velocity –
Probably this is one of the most important factors, also referred to as Pipeline.
Many organizations follow a framework called BANT to identify and qualify leads while prospecting. This helps your sales reps to follow up only with highly qualified leads.
- Budget (B): has the customer allocated a budget towards the initiative or project?
- Authority (A): who in the company has the authority to evaluate and make the decision?
- Need (N): what is the extent of need definition and clarity?
- Timeline (T): is the customer having a timeline to decide and implement the solution?
Some follow a much more detailed investigation and discovery process for unraveling customer needs. They use a series of carefully crafted questions to arrive at the core of the need or problem the client wishes to solve.
Whichever process you follow, it is advisable your team is pursuing the “right” opportunities. You should encourage them to either qualify-in or qualify-out soon. Thus qualified leads helps you not to increase the length of your sales cycle.
Effective opportunity qualification will help them to maximize outcome with least efforts and resources. The emphasis should be on the quality aspect of leads (for better qualification) rather than just quantity.
Over a period of time, you will also appreciate that this factor has a substantial impact on the rest of the other factors too.
Average Deal Value or Average Deal Size
Essence of sales is about maximizing revenue by increasing deal value. Raising this bar can have a significant impact on your sales velocity.
One of the most effective ways to maximize deal size is by making the customer realize the true value of your offering and the impact it can have on their business.
Many companies arrive at their pricing strategy based on customer’s perceived business value. If the pricing is value-based, you need not offer heavy discounts during negotiations; thereby controlling the final order value.
Size of the deals can also be improved by bundling more products and services to address customer requirements holistically. This would only be possible if your team follows the right methodologies during the need-discovery stage to subsequently arrive at the most optimized and comprehensive solution.
However, never force a product or service that is not really required – that will be detrimental to your business in the long-run.
Win-rate, also referred to as deal conversion rate, is the percentage of deals won out of the total number of qualified opportunities. This is one of the highest tracked metrics across businesses.
Renowned sales training company, Rain Group surveyed around 500 sellers to find a benchmark. They found that the average win rate is 47%.
To improve sales velocity, you must consider all the ways to improve your win-rate. It usually involves a thorough analysis of your pipeline management, entire sales process and opportunity execution.
Here are the best ways to improve win rate and convert your prospects to paying customers –
- keep refining the quality of opportunities through rigorous qualification process
- understand buyer personas and their priorities well
- work closely with decision makers and become their trusted advisor
- align your sales process with prospect’s buying process
- get access to sponsors and align with their priorities
- demonstrate business value or impact early
- work on a compelling unique value proposition
- leverage customer testimonials or references to win confidence and trust
- be early in the game to influence decision criterion
- create a close plan for your key opportunities and meticulously follow through
- know your competition landscape and have a strategy to counter each one of them
- gain adequate knowledge about prospect’s problems so that you could challenge status-quo and provide unique insights to your prospect.
- understand and align your story with the metrics prospects use to measure success of the project
- present a risk-mitigation strategy to win prospect’s confidence
- do not spread yourself too thin – focus on quality of opportunities rather than quantity
- provide prompt support and guidance to sales team as and when they hit bottlenecks
Length of Sales Cycle
It is the average number of days that is spent on an opportunity before it is converted or won. It depends on one’s ability to move the deals through the funnel across all sales stages.
Sales velocity and length of the sales cycle has an inverse relationship; which is why this factor is the denominator in the equation. To maximize sales velocity, there has to be conscious efforts towards shortening sales cycles.
Here are the most appropriate steps to shorten sales cycles –
- better deal qualification
- engage with right stakeholders and decision makers
- leverage your leadership team early in the deal to get access to the sponsors
- try to seek an agreement on closure timeline early-on
- deliver a compelling value proposition with clear differentiation
- offer incentives for prospects to make faster decisions
- analyze deal closure probability very objectively throughout the sales stages
- make sure you have addressed all objections before you enter into negotiations
- try to be prescriptive and lead the sales cycle
- be proactive, anticipate bottlenecks and have a mitigation plan
- reduce friction at the time of deal sign-off. Your commercial proposal and terms should be easy to understand and execute
- always ask your prospect for the deal at appropriate stage
- consistently work towards a win-win proposition to win prospect’s confidence and trust
You should ideally track sales velocity consistently every quarter to see if the number is increasing or decreasing; just like a business health score. We suggest you measure this separately for each of your market segments considering their unique nuances.
The true value comes from evaluating the impact on the metric by analyzing what you are doing with rest of the factors. It gives you an opportunity to approach each of the four levers strategically and optimize them for the best outcome.
For e.g. while applying the equation, let us say the number of opportunities do not change. However, one is able to increase the average deal size and win-rate by 10%, and reduce the length of the sales cycle by 10%. You would see that your sales velocity would still improve by 34%!
It is advisable to invest in a powerful Account Management CRM, like HappSales, to automatically track these metrics based on opportunity updates. A dashboard view will help you to easily identify the trends so that you could take necessary steps and make strategic decisions required to achieve desired results.
A complete and objective evaluation, if applied consistently, will equip you with significant insights to stay ahead of your competition. It would eventually set you to lead a best-in-class sales organization with unmatched performance.