Have you ever wondered if there is a way to assign an exact dollar amount to a day’s work? Or a way to show how your sales and marketing teams are directly contributing to the bottom line? What if we told you there was a formula to calculate just that?
Time is money, and sales velocity tells you just how much money your sales team makes in a specific period of time.
Sales velocity is the measurement of the rate at which successful deals move through your sales pipeline to generate revenue. Sales velocity helps organizations forecast revenue for a specific period of time. The formula to determine sales velocity includes four variables: number of opportunities, average deal size, win rate, and length of the sales cycle.
It's important to understand each of the four variables and how they affect the equation before we discuss how manipulating the variables can help boost your sales velocity.
But before we dive into the variables and formula, it’s worth noting you may want to consider segmenting your sales pipeline if you have not done so already. For larger organizations with multiple markets, you may want to segment your sales pipelines into small, mid-market, and enterprise-level pipelines. In other cases, you may segment your pipeline by industry or territory.
Segmenting will help you calculate a more accurate sales velocity specific to the market(s) you are targeting. How, if at all, you segment your pipeline will vary from organization to organization, but it’s crucial to do as variables for each segment may vary drastically.
The four variables of sales velocity are number of opportunities, average deal size, win rate, and length of sales cycle. Fortunately, your organization’s CRM is likely already capturing all of these metrics, but we’ll still review how to calculate each by hand and call out some nuances to ensure you are tracking the right metrics.
You may simply refer to them as contacts, but opportunities are the people or accounts that have gone through a qualification process to indicate they have a need, demonstrate interest in fulfilling that need, and are a good fit for your product. The formula simply requires adding up the total number of opportunities over your given time period.
It’s important to note that the sales velocity formula is not dependent on your raw leads, but rather leads that have gone through some sort of qualification process. This lead qualification process is unique to each organization, but there are two textbook frameworks sales reps commonly use. One is the BANT framework, which is an acronym for filtering leads by their budget, authority, need, and time, and the other is the MEDDIC process, which is applicable for more complex enterprise sale processes and stands for metrics, economic buyer, decision process, decision criteria, identify pain, and champion.
Setting certain parameters based on the historic trends of previously closed deals can actually automate this lead qualification process with AI, helping your reps save time and ensuring leads are consistently and accurately qualified.
The calculation for your average deal size depends on your pricing model. Typically for fixed pricing, it’s the average total revenue of all closed deals (e.g. one time physical product). For performance- or usage-based pricing, it could be a customer’s average lifetime value or a customer’s total lifetime value (e.g. subscription SaaS).
In either case, you’ll want to set a period of time (e.g. month, quarter, fiscal year, etc.) to collect revenue data from all closed deals or from the customer’s lifetime value, then divide the total amount generated by the number of deals or number of customers in that time frame.
A win rate, also known as your conversion rate, is the number of opportunities that become customers. It’s a pretty simple calculation, where you divide the leads that become customers by the number of total leads for that specific time period. For example, if 100 of 333 qualified leads become customers in Q1, your win rate is 30%.
This calculation depends on your sales process, but is typically measured as the average number of days, weeks, or months it takes a deal to successfully move through your sales pipeline.
In order to calculate sales velocity, you will need to track the four variables just discussed and plug them into a simple equation: sales velocity equals the number of opportunities multiplied by the average deal size multiplied by the win rate, all then divided by the length of the sales cycle.
As mentioned before, segmenting your sales pipeline by market size (or other notable differences among groups of customers, like industry or territory) will ensure your variables are calculated correctly. For example, your enterprise level customers will likely have a much larger average deal size compared to SMBs due to budget variations and product needs.
Let’s walk through a quick example; let’s say for Q1 of your new fiscal year, your organization had 100 opportunities, an average deal size of $10,000, a win rate of 30%, and your sales cycle took 50 days on average for your mid-market deals.
After some simple math, we can calculate your sales velocity is $6,000, which is approximately how much revenue your sales team is generating every day among mid-market deals.
Now let’s say you look back and calculate the historic sales velocity quarter over quarter from the fiscal year prior, and realize you had steadily increased on average 15% QoQ without any intervention. So now you want to increase your sales velocity by 25%, from $6,000 in Q1 to $7,500 in Q2 — but how do you boost your sales velocity?
A well defined sales plan will include goals and targets like the one in our example scenario. In order to reach those goals and targets related to your sales velocity — like boosting it — you’ll want to determine the actions you can take and then set and track results-driven SMART goals where the result is the variable you want to manipulate. As a refresher, a SMART goal is a mnemonic acronym that stands for specific, measurable, attainable, relevant, and time-based.
You’ll need to manipulate at least one of the four variables in order to boost your sales velocity, so let’s dive into three of the most common methods and walk through a SMART goal that can help you increase your sales velocity by that 25% next quarter.
Increasing the number of opportunities within your sales pipeline means you’ll either have to increase the number of total leads being generated, or increase the rate at which your leads become qualified — or even both.
Increasing your lead generation will likely be something that requires ramping up outbound sales activities, like increasing the volume of cold calls, emails, and introductory meetings for each rep.
Now going back to our example, to reach our overarching goal of hitting $7,500 in daily sales velocity in Q2, let’s set our first SMART goal: increase qualified leads from marketing campaigns (MQLs) by 25% in Q2. If we increase our opportunities from 100 to 125, and all other variables remain constant, we’ll be able to reach our goal sales velocity of $7,500.
There are pretty obvious, direct benefits to your bottom line when you increase your average deal size. While some sales leaders may not consider this as a manipulable variable, your sales team does have the power to increase the average revenue generated from deals through several key actions. Ultimately, increasing deal size is about selling on value rather than just features.
For example, sales leaders can coach your team on the value of a longer contract, which will help increase the deal's duration. You may also want to consider implementing an approval structure for discounts if one does not already exist to ensure your team is not jeopardizing the lifetime value of the customer.
You can also consider expanding your product line or current product’s features modeled after your customer’s biggest pain points, though this would fall outside the direct control of the sales team. Utilizing a go-to-market strategy can help your leadership team successfully launch a new product or feature to your existing market — and it can also help you reach new markets to increase total leads.
Returning to our example scenario, let’s set another SMART goal: increase the average deal size by 25% in Q2. If we increase the average deal size from $10,000 to $12,500, and all other variables remain constant, we’ll once again be able to reach our goal sales velocity of $7,500.
It’s worth noting that, perhaps not surprisingly, the length of your sales cycle is the only variable you do not want to increase when boosting your sales velocity.
Decreasing the amount of time a deal moves through your sales pipeline all depends on variables unique to your organization like the complexity of your product and the average number of decision makers in a buyer group.
AI can help pinpoint the delays in the sales cycle, allowing your sales team to be proactive in reducing those pain points for future deals. AI can also automate steps within the sales cycle that are commonly delayed or missed entirely by busy sales reps, like following up with newly qualified opportunities or even just updating the lead status field in your CRM.
Let’s go back to our example scenario one last time, and let’s set a new SMART goal: decrease the average days in the sales cycle by 25% in Q2. If we decrease the number of days from 50 to roughly 37 days, and all other variables remain constant, we’ll once again be able to reach our goal sales velocity of $7,500.
Measuring your sales velocity at regular intervals, then comparing past to present performance can help track how your organization is performing in the long run.
While it’s important to measure and track your sales velocity, it’s also important to remember that a single calculation for a single point in time cannot communicate your organization’s overall health.
Sales velocity is, after all, a lagging indicator, meaning it measures your results rather than your actions. And while your results are ultimately created by your actions, you will inherently have more control over your actions than your results.
Tracking progress towards result-driven SMART goals also helps you pinpoint what activities aimed at boosting your results are actually working versus which ones may be falling short. Utilizing leading indicators will help your team gauge what activities are moving you towards your goals, and therefore can boost your overall sales velocity and performance.
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