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Estd 4.22.2023
In the fast-paced world of SaaS, having reliable predictors of future revenue is invaluable. While many executives focus on lagging indicators like MRR or customer acquisition costs, forward-thinking leaders are increasingly turning to Lead Velocity Rate (LVR) to forecast growth with greater accuracy. This powerful metric can transform how you make strategic decisions and provide early warnings of potential challenges ahead.
What is Lead Velocity Rate?
Lead Velocity Rate, also known as qualified lead growth rate, measures the month-over-month percentage growth in qualified leads. Unlike revenue metrics that tell you what has already happened, LVR is a leading indicator that predicts what's likely to happen in your sales pipeline in the coming months.
The concept was popularized by Jason Lemkin, founder of SaaStr, who famously called it "the most important metric in SaaS." According to Lemkin, "Your MRR growth will follow your LVR growth by about 4-5 months, maybe 6 in a longer sales cycle."
Why Lead Velocity Rate Matters for SaaS Executives
1. Predictive Power
LVR gives you a glimpse into the future. Since qualified leads today become customers tomorrow, a consistent LVR provides a reliable forecast of revenue 3-6 months out. This predictive capability is especially valuable in SaaS businesses with longer sales cycles.
2. Early Warning System
A declining LVR serves as an early warning signal. If you notice your qualified lead growth dropping, you can expect revenue growth to follow suit within a few months – giving you valuable time to address issues before they impact your bottom line.
According to research by ProfitWell, companies that regularly track LVR are able to respond to market changes up to 60% faster than those relying solely on revenue metrics.
3. Investment Planning
When deciding where to allocate resources, LVR provides data-driven confidence. A strong, consistent LVR might justify accelerating hiring or marketing spend, while a weakening LVR could signal the need for caution.
4. Sales Readiness
Understanding your LVR helps prepare your sales team for upcoming work volumes. If your LVR shows a 20% increase in qualified leads, your sales teams should prepare for a corresponding increase in their workload.
How to Calculate Lead Velocity Rate
The formula for LVR is straightforward:
LVR = [(Current Month's Qualified Leads - Previous Month's Qualified Leads) / Previous Month's Qualified Leads] × 100
For example, if you generated 100 qualified leads in March and 120 qualified leads in April, your LVR would be:
LVR = [(120 - 100) / 100] × 100 = 20%
This indicates a healthy 20% month-over-month growth in qualified leads.
Implementing LVR Effectively in Your Organization
Define "Qualified Lead" Consistently
The foundation of an effective LVR metric is having a clear, consistent definition of what constitutes a qualified lead. Without this, your LVR calculations become meaningless.
Tomasz Tunguz, venture capitalist at Redpoint Ventures, emphasizes that "the key to making LVR work is maintaining a consistent definition of a qualified lead over time." This might involve lead scoring based on specific behaviors, demographic criteria, or other qualification frameworks such as Marketing Qualified Leads (MQLs) or Sales Qualified Leads (SQLs).
Track and Report Regularly
For maximum effectiveness, track LVR on a monthly basis and compare it against historical trends. Many successful SaaS companies include LVR in their executive dashboards alongside traditional metrics like MRR, churn, and CAC.
Segment Your Data
For deeper insights, consider calculating LVR for different segments:
- By marketing channel
- By product line
- By target customer profile
- By geography
This segmentation reveals which areas of your business are poised for growth and which may need attention.
Correlate with Revenue
To validate LVR's predictive power for your specific business, track how closely your LVR correlates with actual revenue growth after your typical sales cycle length. This will help you determine the lag time between lead generation and revenue impact in your unique business context.
Common Pitfalls to Avoid
1. Inconsistent Lead Qualification
If your definition of a qualified lead changes over time, your LVR becomes meaningless. Establish clear criteria and ensure they're applied consistently.
2. Focusing on Quantity Over Quality
A high LVR driven by low-quality leads won't translate to revenue growth. Balance growth in lead numbers with lead quality metrics.
3. Seasonal Variations
Many businesses experience natural seasonal fluctuations in lead generation. Compare your LVR to the same month in previous years to account for these patterns.
4. Ignoring Context
LVR should be interpreted alongside other metrics. A rising LVR combined with declining conversion rates might indicate quality issues in your lead generation process.
Real-World Impact: How Companies Use LVR
HubSpot, a leader in inbound marketing software, credits their focus on LVR for helping them maintain consistent growth. According to their team, monitoring LVR by channel allowed them to identify early that certain content strategies were producing higher quality leads, enabling them to pivot resources months before those changes would have been evident in revenue numbers.
Similarly, Salesforce uses LVR segmented by product line to help determine which areas of the business deserve additional investment in the coming quarters.
Conclusion: Making LVR Work for Your Business
Lead Velocity Rate is among the most powerful forward-looking metrics available to SaaS executives. By providing visibility into future revenue growth, it enables more confident decision-making and earlier course corrections when needed.
To implement LVR effectively:
- Establish a consistent definition of qualified leads
- Track monthly changes in qualified lead generation
- Segment your data for deeper insights
- Validate the correlation between LVR and revenue for your specific business
By adding LVR to your executive dashboard, you'll gain a clearer picture of what's coming down your pipeline, allowing you to steer your business with greater confidence and precision. In the words of Jason Lemkin, "If your leads aren't growing, your revenue won't grow either." LVR gives you the insight to ensure that never happens to your business.