How fast are you making money? You only have to look at your sales velocity, among the key sales metrics that SaaS companies track to improve their bottom line and grow sustainably.
Sales velocity is a measure of how quickly a sales team is able to convert a sales opportunity to a closed-won deal. It is sometimes referred to as sales funnel velocity or pipeline velocity.
Tracking sales velocity is important for a number of reasons:
Calculating sales velocity is straightforward once you have the following data: number of sales opportunities, deal value, win rate, and the length of the sales cycle.
You can then use the sales velocity equation:
[Number of opportunities creates (#) x average deal value ($) x win rate (%)]/Sales cycle length (L)
Let’s look at the impact of each variable in the sales velocity formula.
Number of opportunities: This is the number of qualified leads that advance in your pipeline over a period of time. High-quality leads help sales velocity. So, the focus should not be on just increasing the number of leads but generating quality leads that have a better chance of converting.
Average deal size/value: This is the average dollar value per closed deal. To calculate the average deal value, add the size of each closed-won opportunity over a time frame and divide it by the number of deals in that period.
Instead of the average deal size, you can use average customer lifetime value, which is the total amount of money a customer brings in throughout the course of the relationship. It is calculated as follows:
Average purchase value x Average purchase frequency x Average customer lifespan
Average purchase value = Total revenue/Total number of purchases
Average purchase frequency = Number of purchases/Number of unique customers
Average customer lifespan = Sum of customer lifespans/Number of customers
Your customer relationship management system (CRM) will have all the data.
Win rate: The win rate or conversion rate is the number of qualified customers that you convert to customers in a given time. It is calculated as follows:
Total number of closed-won deals/Total number of opportunities
Proper lead qualification can improve the win rate, which in turn can lead to a higher sales velocity.
Length of your sales cycle: This is the number of days or months it takes on average to close a deal. The sales cycle length is calculated as follows:
Total number of days to close a deal/Total number of deals
In an ideal situation, you want to be able to acquire customers in as less time as possible. In reality, the amount and time taken for customer acquisition will depend on your industry. To optimize the sales cycle, sales managers should evaluate the sales process for pain points and create consistency in sales reps’ performance.