.png)
Estd 4.22.2023
In the competitive SaaS landscape, executives are constantly seeking reliable metrics to gauge business health and forecast growth. Among these metrics, sales velocity stands out as a powerful indicator of your revenue engine's performance. But what exactly is sales velocity, why should it matter to your executive team, and how can you measure it effectively? This article breaks down this crucial metric and provides actionable insights for SaaS leaders.
What Is Sales Velocity?
Sales velocity measures how quickly your company is making money. More specifically, it calculates how fast leads move through your sales pipeline and convert into revenue. Unlike simple metrics that track closed deals or revenue targets, sales velocity gives you a comprehensive view of your sales efficiency by combining four critical components:
- Number of opportunities
- Average deal value
- Conversion rate (win rate)
- Sales cycle length
The standard formula for calculating sales velocity is:
Sales Velocity = (Number of Opportunities × Average Deal Value × Conversion Rate) ÷ Sales Cycle Length
This formula produces a dollar value that represents how much revenue your sales team generates per day, week, or month.
Why Sales Velocity Matters for SaaS Executives
Holistic Performance Indicator
While individual metrics like win rate or average deal size provide valuable insights, sales velocity combines these elements to give you a comprehensive understanding of your sales performance. According to research by InsightSquared, companies that regularly track sales velocity see 25% higher growth rates than those focusing only on traditional metrics.
Predictable Revenue Planning
As a SaaS executive, predictable revenue is essential for strategic planning. Sales velocity helps forecast future revenue more accurately by considering the full spectrum of sales efficiency metrics. Research from Salesforce indicates that organizations with high sales velocity consistency can forecast quarterly revenue within 5% accuracy, compared to 15-20% for those who don't track this metric.
Identifying Specific Improvement Areas
The multi-dimensional nature of sales velocity allows you to pinpoint exactly where your sales process needs improvement:
- Is your opportunity count too low? Focus on lead generation.
- Is your average deal value below target? Revisit your pricing strategy or value communication.
- Is your conversion rate suffering? Improve sales enablement and qualification processes.
- Is your sales cycle too long? Look for bottlenecks in your sales process.
According to McKinsey, SaaS companies that optimize based on sales velocity components see a 10-15% increase in annual contract value (ACV) compared to competitors.
How to Measure Sales Velocity
Step 1: Gather Your Component Metrics
Start by collecting accurate data for each component of the sales velocity equation:
Number of Opportunities: Count the total number of qualified opportunities entering your sales pipeline within your measurement period (typically a month or quarter).
Average Deal Value: Calculate the mean value of all closed-won deals during your measurement period. For subscription-based SaaS models, use the annual contract value (ACV) or total contract value (TCV).
Conversion Rate: Divide the number of won deals by the total number of opportunities that either closed (won or lost) during the measurement period.
Sales Cycle Length: Measure the average time (in days) it takes for opportunities to move from qualification to closed-won status.
Step 2: Apply the Formula
Once you have these metrics, plug them into the sales velocity formula:
Sales Velocity = (Number of Opportunities × Average Deal Value × Conversion Rate) ÷ Sales Cycle Length
For example, if you have:
- 100 opportunities
- $20,000 average deal value
- 25% conversion rate
- 60-day sales cycle
Your sales velocity would be:
(100 × $20,000 × 0.25) ÷ 60 = $8,333.33 per day
This means your company is generating approximately $8,333 in new business each day.
Step 3: Benchmark and Track Over Time
The absolute value of your sales velocity is less important than how it changes over time. Establish a baseline and track it monthly or quarterly.
According to OpenView Partners' SaaS Benchmarks Report, top-performing SaaS companies improve their sales velocity by 15-20% year-over-year, while the industry average is around 8-10%.
Strategies to Improve Sales Velocity
Once you understand your sales velocity, you can work on improving each component:
Increase Number of Opportunities
- Optimize lead generation channels with highest conversion to qualified opportunities
- Implement account-based marketing (ABM) strategies for enterprise targets
- Develop referral programs targeting your ideal customer profile
A study by TOPO found that companies implementing ABM strategies saw a 33% increase in opportunity generation compared to traditional marketing approaches.
Increase Average Deal Value
- Develop effective upselling and cross-selling strategies
- Review pricing models and packaging
- Train sales teams on value-based selling methodologies
- Identify and pursue larger enterprise accounts
Research from Price Intelligently shows that a mere 1% improvement in pricing strategy can yield an 11% increase in profit.
Improve Conversion Rate
- Refine your qualification criteria
- Enhance sales enablement with better content and tools
- Implement regular sales coaching and training
- Optimize your demo-to-close process
According to CSO Insights, companies with formal sales enablement functions achieve 10-15% higher win rates than those without structured programs.
Reduce Sales Cycle Length
- Map and eliminate bottlenecks in your sales process
- Streamline your approval workflows
- Implement digital signing solutions
- Offer incentives for faster closes when appropriate
A Gartner study indicates that sales organizations that actively manage their pipeline velocity see 28% higher revenue growth than those that don't.
Common Pitfalls to Avoid
When implementing sales velocity metrics, watch out for:
Focusing on only one component: Improving one metric at the expense of others (like sacrificing deal value for faster closes) can actually reduce overall velocity.
Inaccurate data collection: Sales velocity is only as good as the data you feed into it. Ensure your CRM hygiene is impeccable.
Not segmenting your analysis: Different products, market segments, or sales teams may have different velocity profiles. Segment your analysis for more actionable insights.
Ignoring seasonality: Many SaaS businesses experience seasonal fluctuations. Account for these when analyzing velocity trends.
Conclusion
Sales velocity is more than just another metric—it's a comprehensive framework for understanding and improving your company's revenue generation efficiency. For SaaS executives, it provides both a high-level view of sales health and granular insights into specific areas needing attention.
By regularly tracking sales velocity and methodically working to improve its components, you can accelerate your company's growth trajectory, improve forecasting accuracy, and gain competitive advantage in the fast-moving SaaS marketplace.
Start by establishing your current sales velocity baseline, then set realistic improvement targets for each component. Remember that even small improvements across multiple components can dramatically increase your overall sales velocity—and your bottom line.