What Is The Sales Velocity Formula?

Sales…

”The act of transaction between two or more parties where goods and services are exchanged for payment”

Velocity…

”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.

Sales Velocity Definition

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:

• The more knowledge you have of your pipeline numbers in relation to the time and effort you are taking to produce sales, the more you will be able to utilise your time and effort in the right direction
• The speedier your conversion rates, the more profit potential there is for you
• The higher your sales velocity, the more revenue you bring in, in a shorter time
• Your sales velocity will pinpoint where you should be spending your time and how you can become more efficient and effective

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.

Sales Velocity Equation

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.

The Sales Velocity Formula

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:

• 28 Opportunities
• 27% conversation rate
• £5,050 deal size
• 58 days Sales cycle

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:

• What changes have you instigated to achieve those improvements?
• Which specific parts of the sales process can improve your sales velocity figures?