The key to evaluating the success of any business invariably lies in numbers. Sales figures, profits, growth rates, and other metrics indicate how well a business performs or underperforms. As such, one crucial metric that companies often overlook is the sales velocity. Sales velocity measures how quickly a company closes a sale or the speed at which revenue is generated. Understanding how to perform a sales velocity calculation is thus vital for companies to assess their sales performance accurately. Below, we will delve into the comprehensive guide to understanding and calculating your company’s sales velocity. Keep reading to learn more.
Understanding Sales Velocity
Sales velocity measures the speed at which a company converts its leads into paying customers within a specified period—usually a month or a quarter. Sales velocity comes from physics, where velocity measures an object’s speed in a specific direction. In the business world, sales velocity is the speed at which sales and revenue are generated.
Importantly, sales velocity can provide companies with insights on several fronts. Firstly, it highlights the effectiveness of a company’s sales process. If a firm’s sales velocity is high, leads are being converted into customers quickly, which is usually a good sign. Conversely, a low sales velocity can indicate issues in the sales process, such as ineffective sales pitches or poor lead quality.
The second insight gained from examining sales velocity is its close link to cash flow. Sales, after all, directly impact a company’s cash flow. A high sales velocity indicates a steady money flow into the business, while a low sales velocity may suggest cash flow issues. Companies can then use this knowledge to adjust their sales strategies and improve performance.
The Formula for Sales Velocity
The formula for sales velocity involves several variables: The number of opportunities or qualified leads a company has within a given period, the average deal size or the average revenue per sale, and the win rate or conversion rate is the percentage of leads that convert into customers. Lastly, the sales cycle length is the time it takes to close a sale. The calculation is done by multiplying the number of opportunities, the average deal size, and the win rate, then dividing the total by the length of the sales cycle.
Companies can use this formula to see how changes in each variable can influence their sales velocity. For example, increasing the number of opportunities, the average deal size, or the win rate could all increase sales velocity. Decreasing the length of the sales cycle could achieve the same effect. Therefore, the formula provides valuable insight into which areas companies should focus on to improve their sales performance.
Ways To Improve Sales Velocity
Alt text: A team leader discussing a sales velocity calculation with sales employees sitting on a couch.
Once a business understands its sales velocity and identifies areas for improvement, there are several strategies it can employ to increase it. First, improving the quality of leads can significantly affect sales velocity. Companies can refine their lead generation strategies to target customers more likely to buy their products or services. Higher-quality leads not only increase the conversion rate but can also reduce the sales cycle length.
Another strategy to improve sales velocity is to reduce the sales cycle length. Companies can achieve this by making their sales process more efficient. This might entail improving the sales pitch, providing better training for sales staff, or streamlining the sales process so customers can make purchasing decisions faster.
While sales metrics like overall revenue or individual sales volume have their places, sales velocity provides a unique perspective on how efficiently a business generates income. By understanding how to calculate and interpret sales velocity, companies can take action to improve their performance and drive their growth.