What is the Sales Velocity Equation and How can You Use It to Drive More Sales Today?
In the briefest of terms, sales velocity represents how fast you are able to sell your product and how much you sell in that period. A much more in-depth way to understand sales velocity and to get an idea of how it can benefit your business directly is to examine the sales velocity equation.
What is the sales velocity equation?
The sales velocity equation is this:
Sales Velocity = (# x $ x %) / L
# = Number of sale opportunities (leads)
$ = Individual deal value
% = Win rate
L = Length of your sales cycle
Your sales velocity is a function of the number of leads you have to sell to, the value of a closed deal, the percentage of deals you win, all divided by the length of time it takes to close a deal. In the grand scheme of most businesses, this formula can be applied to create a very simple calculation of your sales velocity and the general strength of the sales funnel in your business. It can then be used to quickly get an idea of what you should improve upon and, if by improving certain things, how much your business velocity is expected to increase.
How can the sales velocity equation grow your business?
From the equation, there are four straightforward ways to increase your sales velocity: get more leads, increase the value of the deals you close, win more deals and decrease the length of the sales cycle. In very straightforward maths, if you increase the first three of those by 10% each and then decrease the fourth by 10%, you will increase your sales velocity by almost 48%:
Taking a base rate of one for each component and then increasing/decreasing by 0.1:
Velocity = (1.1×1.1×1.1)/0.9
Velocity = 1.47888888
This represents roughly a 48% increase in your sales velocity by merely improving each factor by just 10%.
Applying it to your business
In the real world, a 10% improvement in each of those isn’t necessarily straightforward and there are a number of issues that arise in trying to simply up your number of leads or increase your price. You could go out tomorrow and find 1,000 more leads for your business but this wouldn’t improve your sales velocity unless they are all good quality leads that actually have a realistic chance of purchasing your product. If you decide to increase your prices by 10% this could mean that you’re no longer competitive and your sales volume falls. By attempting to decrease your sales cycle, this could mean that a lack of proper work has gone into closing each deal, and fewer people actually decide to purchase, or perhaps they decide to purchase but choose to buy a smaller amount. And finally, improving your win rate isn’t something you can implement straight away but is instead something that is decided by how well you perform in other aspects of managing leads.
Instead, the way you should effectively implement this formula is to take a critical look at the strengths, weaknesses, and opportunities that are within your business. More likely, the case will be that you should focus on just one of the above and reap the massive returns this will bring. For example, say you have good working relationships with all of your customers, it’s hard to find more good quality leads and decreasing the sales cycle will likely tarnish the relationships that you have worked so hard to build. Then, in this case, the answer is staring you in the face. You should find a way to upsell to those customers who are already clearly very fond of your business. You may find the potential to sell 10% to 20% more straight away to these individuals by improving your product line or building extra value into what you sell. Though this will lead to more modest returns in your sales velocity, they will be returns nonetheless and add straight away to your bottom line with less effort or risk.
Who should implement this change?
One of the biggest issues an organization will face when looking to immediately improve their sales velocity is a lack of effective communication. Suppose you are an employee whose job it is to close telephone sales. Your boss comes over and tells you that you need to improve your sales velocity, and to do that you need more leads and you need to be closing deals quicker. So you jump on the phone and start calling every number you can find and start pressuring customers to close. From your point of view, you’re doing exactly what you’ve been told and the company will be all the better for it; however, in all likelihood, your sales velocity will have just fallen.
Instead, proper implementation of lessons learned need to come from management but need to be fed through in a way that can be clearly understood and acted upon. You, as a manager, should make all your staff aware of this formula and how each factor will improve the company’s strength. But you need to make clear that focus needs to be kept on maintaining the quality of not just the leads that are sourced, but also the way in which every lead is managed. If they feel like they really don’t have enough time to source more leads, then work with them on ways they can bring greater value from their existing clients. If they feel like the number of leads isn’t the problem but instead, it’s the number they are actually able to close, then maybe it’s time to work on some training schemes to improve their communication and understanding of the product so that they can win more deals.
As management, you need to think critically about how well your business performs in each of these aspects and where the biggest opportunities lie. If possible, you also need to find things that the company is doing that aren’t improving any four of those categories. Because if that’s the case then time needs to be better managed to ensure there is a clear focus on improving what needs to be improved, and forgetting about other time wasting activities.