New prospects are obviously important, but they don’t all turn into sales and not all opportunities are worth the same amount. Measuring sales velocity is a great way of bringing it all together to reveal just how fast your sales function is generating additional value for your business.
In this two-part article, we explore the concept of sales velocity. This part introduces sales velocity and explains how it can be calculated from your sales pipeline. Part 2 looks at velocity-based forecasting and shows you how to calculate a monthly sales forecast that you can generate from new business.
What is sales velocity?
Why is sales velocity such an important concept?
1. Your marketing efforts need to ensure you are talking to enough prospects.
2. Your product and sales team need to be working together well enough to convert those prospects into customers.
3. This needs to happen for the customers that are willing to pay you a fair price – there’s no point just being great at converting the low value leads. Sales velocity wraps up all three of these into one simple measure that the whole business can understand.
By measuring sales velocity regularly, you can benchmark performance progress and even compare different parts of your business. You can identify areas for improvement and scenario plan to see what impact a change – maybe adding a new sales role – should deliver.
The sales velocity formula
Calculating your sales velocity (‘Sv’) requires three key pieces of data:
- Deal frequency ( ‘Df’’)
- Win rate (‘Wr’)
- Deal value (‘Dv’)
These measures can all be calculated from your sales pipeline. This can be tricky if you don’t already have a good sales process to capture such data but should be readily accessible if you have a good CRM (and keep it up-to-date of course). Read our CRM best practice blog post for more tips.
Calculate your sales velocity by multiplying deal frequency by win rate and deal value.
For example, if you typically generate 50 leads a month with a 10% win rate an average won deal value of $100k, your sales velocity calculation will be as follows:
Sv=50 deals per month ∗10%∗$100,000 per deal=$500,000 per month
The three components of sales velocity
- Deal frequency ( ‘Df’’) – the average number of new prospects add to your sales funnel each month. In your CRM, this will be the average number of deals with a new ‘create date’ each month. At this stage, just count the number of deals and ignore their value.
- Win rate ( ‘Wr’) – the proportion of prospects that convert into paying customers over a given period. Calculated as Won deals/(Won deals + Lost deals). In your CRM system, take only deals with a ‘close date’ in the period you are interested in, count the won and lost deals from there and calculate your win rate. Note that the win rate ignores deals that remain open on the basis that they could become either won or lost. So you should be careful about stale opportunities that should really be classified as lost as these will over-state your win rate.
- Deal value ( ‘Dv’) – the average value of awarded deals. This is where the monetary value comes in and it’s important that we measure it for won deals only for the sales velocity formula to work.
Beyond sales velocity – introducing velocity-based forecasting?
The sales velocity metric by itself does not consider how long it takes monthly sales value to ramp-up. However, by including two more sales measures (months to convert and deal length), the sales velocity concept can be extended further to calculate a ‘velocity-based forecast’ – a forecast of sales generated from new business over time.
You can read more about velocity-based forecasting in the second part of this blog.