TL ; DR
Sales velocity is the rate at which your open sales opportunities can potentially be converted into booked revenue. It's typically used as a leading indicator to drive future improvements in opportunity volume, deal size, win rate and sales cycle length.
Calculate your sales velocity with this formula:
Let's insert some numbers into the formula :
Sales Velocity = (100 open opps * €5,000 avg. deal size * 30% historical win rate) / 60 days sales cycle length = potential to deliver €2,500 booked revenue per day.
This implies that we can generate booked revenue at a rate equivalent to €2,500 daily, for the duration of the sales cycle length (in this case the next 60 days), based on the 4 metrics above remaining consistent.
This is your starting point, the next steps are to devise strategies to increase your sales velocity, i.e., generate booked revenue faster, for each of the 4 metrics. For example let's assume we deploy a strategy to automate and streamline our solution and proposal stages that result in a 15% decrease in the sales cycle length to 51 days (down from 60):
SV = (100 * €5,000 * 0.30) / 51 = €2,941 per day
Now we gain an additional ~17.5% just by reducing the sales cycle by 9 calendar days, and don't have to contend with price increase conversations, increase the number of open opportunities or improve our win rate.
Please continue reading for a deeper dive into how sales velocity is an effective metric to help you develop revenue growth strategies.
The benefits of monitoring your sales velocity
As a CEO/Founder/Sales leader of your company, whilst your primary focus is on revenue growth, sales velocity is probably a metric you don't monitor specifically, but one that you almost certainly keep an eye on its underlying components.
Let's take a look at the definition, use cases and formula for sales velocity:
Sales velocity is the rate at which your open sales opportunities can potentially be converted into booked revenue. It's typically used as a leading indicator to drive future improvements in opportunity volume, deal size, win rate and sales cycle duration.
SV = (Number of open opportunities * average deal value * historical win rate) / historical sales cycle length
Ok, nothing new there, we already track all those component metrics, I here you say. Consider this however; the sales velocity metric gives you a holistic view, through one metric, on how your sales strategies, processes and systems are performing rather than a focus on individual component metrics that tell their own story but not how they relate to each other.
For example, how many times have you heard the mantra 'if we could just increase the average deal size by X then we could fix our revenue growth problem'? What this doesn't factor in is the impact on your win rate and sales cycle length, both of which could go in the wrong direction. Or what about strategies to increase open opportunities? Yes this is a strong strategy, but not if the quality of those opportunities starts to lower our average deal size.
Sales velocity as a metric can also feed into revenue forecasting giving you a better sense of resources needed and help with business planning and decision making.
It's often not possible to tackle each of the component metrics in parallel, you simply don't have the resources and bandwidth to do so. Sales velocity as a metric helps you to prioritise one component at a time and monitor the overall impact of the speed at which booked revenue could be generated
Review of each formula component:
Number of open opportunities: This represents the total number of potential deals or sales opportunities that are currently in your sales pipeline. You can further filter this number by the forecast category, for example you could filter on commit deals only or commit and upside deals only. The more strict you are on the filter, the tighter your overall metric because there should be a higher probability of commit deals closing than say those in earlier forecast stage categories.
Average deal value: This is the average revenue you expect to generate from each sale, which is derived by taking the sum of the revenue for the open opportunities and dividing it by the count of open opportunities.
Historical win rate: This is the ratio of sales opportunities that you have successfully closed in the past. For example if you win 3 out of every 10 deals, your win rate is 30%. This metric incorporates your team's effectiveness in converting opportunities into actual sales.
Historical sales cycle length: This is the average time, in days, it takes for a new opportunity to move through your sales pipeline and become a closed won deal.
Example of a €2,500 per day sales velocity
Number of open opportunities = 100
Average deal value = €5,000
Historical win Rate = 30% (or 0.30 if expressed as a decimal)
Historical sales cycle length = 60 days
Sales Velocity = (100 * €5,000 * 0.30) / 60 = €2,500 per day
This implies that we can generate booked revenue at a rate equivalent to €2,500 daily, for the duration of the sales cycle length, based on the 4 metrics above remaining consistent. Note, if your business is highly unpredictable across the 4 metrics, then it will be reflected in the sales velocity measure, i.e. it too will be unpredictable and fluctuate each time you calculate it.
Understanding your Sales Velocity is essential as it provides a baseline value against which you can track improvements in your sales process. The goal is to increase this value over time, either by increasing the number of opportunities, increasing the deal value, increasing the win rate, or decreasing the length of the sales cycle. Improving any of these underlying metrics can improve your Sales Velocity but you must also acknowledge the effect they have on each other.
Let's run through two more examples, using the baseline of €2,500 per day as a starting point for our sales velocity (SV). To improve our SV, we decide to deploy a strategy of pricing increases that will boost the average value of the deal sizes by €1,000 to €6,000 on average (i.e, a 20% increase on €5,000). However, it's expected that deals will take a little longer to close and that the average sales cycle length will increase by 15% to 69 days.
Running this through our formula:
SV = (100 * €6,000 * 0.30) / 69 = approximately €2,609 per day
Whilst this is clearly an improvement over €2,500, it's only a ~4% increase for a 20% increase in pricing and we also know that price increases are likely to effect our close rate too so the improvement could drop further. Overall, this doesn't look like a great strategy in isolation.
What if we deploy strategies that reduced our sales cycle length and leave prices as they are? We can go into the detail of what these strategies would look like later, but for now, let's assume a 15% decrease in the sales cycle length to 51 days (down from 60).
SV = (100 * €5,000 * 0.30) / 51 = approximately €2,941 per day
Now we gain an additional ~17.5% just by reducing the sales cycle by 9 calendar days, and don't have to contend with price increase conversations.
At this point, it should be clear that reducing our sales cycle and keeping everything else constant can deliver an improvement. But how do we do that?
For an existing client base, a good starting point is to segment your clients to identify those key clients that have the highest probability of revenue growth (I'll write another detailed article on how I segment clients by current revenue and future revenue growth potential). Now that you have narrowed your focus on key clients, it's time to develop a Key Account plan.
The Key Account Plan (KAP) is the cornerstone of a two-pronged approach to delivering revenue growth, in this case, selling more to existing clients. For acquiring new clients, I recommend developing an Ideal Client Profile, Buyer Personas and a Value Proposition Canvas. Both of these topics are subjects for future blogs and tap into strategies for improving your Sales Velocity.
I hope you found this blog a useful primer to understanding the basics behind the sales velocity measurement and it has triggered some thoughts and potential new strategies for getting the revenue growth you crave!
FAQs
Q. Can the formula be simplified to Open Opp Value * Win Rate % / Sales Cycle Length, why should we bother using Open Opps and Avg. Deal Size ?
A. Yes, you could do that and get the same answer, however the main purpose is to devise strategies that improve the underlying metrics. By breaking the formula down further (i.e., including no. of open opps and the average deal size) we can determine what strategy might work best. For example, I might be constrained on the pricing of deal but I could influence how many deals I have in my pipeline. I can then determine if I were to add X no. of new deals and keep the avg. deal size the same, how that would impact my sales velocity.
Q. Can I apply the formula to individual sellers or is it a team or company level metric?
A. You can apply this formula at individual seller and all levels above this, e.g. team, department, area, region etc. If you hold regular accountability reviews with individual sellers, then it's a useful metric to use and compare to the team average, this will help you (as a sales leader) to provide specific coaching on areas such as win rate, deal size, opp volumes and duration of sales cycle.
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