Written by Sean McPheat |
”The act of transaction between two or more parties where goods and services are exchanged for payment”
”The speed of something in a common direction”
You may have heard of the term ‘Sales Velocity Formula’ and even discussed it at meetings, but what is its application and why should it be something that you should take seriously?
This article will explain what it is, how you can work it out and how to improve your own sales velocity for your own and your company’s benefit.
Referring back to the definitions of the two words above, we can identify ‘sales velocity’ as ‘the rate at which money changes hands within an economy’, or ‘a measurement of how fast you’re making money’ against the time it takes to make it.
Relatively speaking, you need to know how quickly leads are going through your pipeline and the overall value of new customers you are creating against the time it takes to make them.
Gaining customers is vital, but if it takes too long for your pipeline to end up as customers, your efficiencies will be low and the return on the time you invest in those prospective customers will also be low.
Knowing your sales velocity will benefit you in a number of ways:
Bearing these ideas in mind, your sales velocity figures should play an important part in identifying where your main efforts should be centered, so you’re not wasting too much of your precious time in chasing dead deals.
How can you work out your own sales velocity?
A relatively simple equation should help.
To help you develop your own understanding of your specific sales velocity, an equation is used to show where you are needing to pay attention.
Four components make up the equation:
1. Number of Opportunities
This normally relates to the number of leads you can handle over a measurable period. You might have created them through cold calling or other business development activities. You can identify these through various areas, broken down through region, product range or sales representative
2. Average Deal Size
Your measurement may simply involve the average figures for each sale. Some companies measure the lifetime value of a client, allowing them to see where their important time should be invested
3. Win Rate or Conversion Rate
This part of the equation is relatively easy to work out. Your conversion rate identifies what percentage of your leads actually end up being customers.
If 4 out of 20 leads end up being your clients, your win or conversion rate is 20%
4. Pipeline Length or Sales Cycle Length
This measures the amount of time it takes for your prospects to move through your pipeline and come out the other end. Naturally, this depends on how complex your sales cycle is (short transactional sales will be much quicker than longer, complex relationship-building ones) but the length of your sales cycle can be a key part of recognising how your processes can be developed.
These four components can be used in the sales velocity equation to see where your sales process can be improved.
Simply put, you multiply numbers 1, 2 and 3 from the above list, and divide the result by number 4.
It looks like this:
This equation gives you a clear picture of what your current figures are, and its measurements can be used for comparison purposes, as well as identifying improvement opportunities.
Let’s consider an example…
Let’s say you have these figures:
You have 25 possible opportunities in your pipeline at present.
You work out your average deal size is £5,000 per customer.
You convert one in four of your opportunities, so your conversion rate is 25%.
From start to finish, your sales cycle lasts 60 days.
Remember, these are your current average figures.
So, your equation for sales velocity would read:
Sales velocity = (25 x 25% x £5,000) / 60
This equation works out at £520.83
This figure represents the approximate daily revenue you are bringing in.
If you remember your maths from school, you’ll recall the only ways that you can improve the overall answer (sales velocity, in this case) is by increasing the top numbers (Opportunities, deal size or conversion rate), or by decreasing the bottom number (sales cycle length).
But this only gives you a snapshot of how things are going for you, similar to a company’s balance sheet.
For it to be really effective, you need to measure this over a period of time and identify what changes have occurred and its effect on your sales velocity figures.
For example, if you had the above figures in March, and by June your figures read:
You’ll see the figures haven’t changes that much, but your daily revenue figure (the sales velocity) now works out at £658.24 compared to £520.83
Your opportunities have only risen by 3, your conversion rate has improved by 2%, your deal rate has only gone up by £50 (1%), and the sales cycle has only come down by 2 days….but the sales velocity (daily revenue) has shot up by £137.41.
That’s an increase of 26.3%!
Can you see why it’s so important to keep an eye on your sales velocity figures?
Of course, your figures are just one component of your whole sales process.
They only highlight the results. What you need to work out is:
Now you know the figures needed to work out the sales velocity for you or your department, you can analyse which parts of the process can, if focused on, give you the greatest return on your time invested. That way, you’re working on increasing your efficiencies and effectiveness.
As you’ll see from the above examples, you can increase your sales velocity by either increasing your opportunities, deal size or conversation (win) rate, or by lowering the time the sales cycle takes (improving the time it takes for prospects to become customers).
All of these elements are what you can focus your Sales Training efforts on. You need to know what to improve and how to improve them rather than attending a generic course that will cover certain topics that will be of no benefit to you at all. It can also give your Sales Coach or Sales Manager some ideas on how to effectively support you.
So where should you focus your time?
You can choose from:
Improving your conversion rates
This entails looking at your pipeline and analysing where the leaks may be occurring. Is there a pattern you can see developing?
Do many of your prospects stall at certain points, e.g., during negotiations?
You may need to adapt your process for targeting and caring for prospects. Maybe your lead definition needs to be honed. Maybe you need to look at your qualification processes to see if the prospects are the right ones for your business post-covid.
By developing a more robust process in ascertaining your pipeline prospects, you start to see those companies emerge where you should be spending more time caring for.
Increasing your average deal size
This seems a simple thing to say, and can be beneficial, but you have to weigh up the benefits of upselling, offering strategic discounting structures and partnership deals, with the inevitable increase in time it can take to close, hence increasing your sales cycle time.
This means you have to be thinking smarter, not bigger. There may be some benefit in looking at high-value prospects, but they can take an inordinate amount of time to manage. Similarly, spending time on ‘low-hanging-fruit’ may not yield the results you really need, as the overall deal size may decrease.
You need to balance the opportunities with both types of prospects, allowing the pipeline to develop in a variety of prospect sizes.
Decreasing your sales cycle length
This is another area that you can influence. If you find your sales cycle times increasing, take a look at where those leaks or blockages are occurring. What stages are causing concern? Where do the majority of prospects stall in the process?
By analysing the skillsets you need to clear some of those blockages, you will develop the ability to see where your time can be most efficiently spent.
For example, one of our clients saw the need to improve their sales team’s negotiating skills, after we had pinpointed a particular blockage in their sales cycle. It didn’t take long for the team to decrease the length of the sales cycle when they had cleared that blockage in the pipeline.
I hope that you see the benefits of measuring and keeping track of your sales velocity over a period of time?
Immediately, you’ll start identifying where your time is best spent and how you can improve your overall revenue. Also, the data you will glean from this exercise will help you to optimise the whole team’s processes, so you will no longer be spending time trying to improve your deal size while losing opportunities from your pipeline, or offering too high a discount structure while decreasing your deal size.
Pay attention to your figures and create more opportunities to build awareness of where you can improve your whole sales process. That’s the real beauty of knowing your overall sales velocity.
Originally published: 5 August, 2021
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