3 minute read / Mar 27, 2016 /
The Equation that Governs Your Sales Team's Effectiveness
Sales velocity is the equation that governs the effectiveness of your SaaS startup’s sales team. Often, sales teams use the word sales velocity to refer to the number of signed contracts in a given month or quarter. But sales velocity classically defined is a different concept.
Sales velocity originates from operations research, field of study pioneered by Charles Babbage, one of the fathers of computing, and Georges Doriot, the patriarch of the venture capital industry. Sales velocity measures the output of the sales team in dollars per day or month.
To calculate sales velocity, multiply work in progress by win rate and by average price and divide by sales cycle. For example, if the average account executive can manage 20 concurrent client conversations, close 20% of them at $15,000 each in 30 days, that implies a sales velocity of $60,000 per month or $2,000 per day.
Let’s walk through each variable. The sales team specialization advocated by Aaron Ross in Predictable Revenue aims to maximize work in progress. The sales development representatives tackle lead qualification, enabling this account executives to focus exclusively on minimizing the sales cycle and maximizing the win rate.
Other factors also impact work in progress. Lead volumes are the most significant. The more qualified leads per account executive, the greater the work in progress per salesperson.
Win rate measures the percentage of sales qualified leads that sign a contract. It is impacted by the skill of the sales team and competitive dynamics including the amount of competition, the company’s differentiation relative to its competition, and the strength of the company’s brand.
Sales cycle, typically measured in days, tabulates the amount of time required from the first qualification to the customer signing a contract. Multiparty sales processes, substantial education requirements, and onerous deployments extend sales cycles.
Average price is the mean value of contracts sold by an account executive or the team. Price is a marketing tool, that is determined by the company’s competitive positioning (premium versus commodity) and strategy.
Sales teams seek to maximize their sales velocity by decreasing sales cycles and increasing prices, win rates and work in progress. But, these numbers don’t move in isolation; they are not independent. Increasing the average price might lengthen the sales cycle and decrease the win rate. Lengthening the sales cycle will decrease the work in progress, as salespeople must spend more time with each client.
Some companies measure sales velocity by account executive. Others measure it for the entire team. In the beginning, sales velocity can be quite volatile, particularly as early stage software companies’ lead volumes fluctuate with new paid acquisition channels, and the sales team begins to develop a repeatable sales process. As the business increases prices or addresses a new customer segment or scales the sales team, velocity fluctuates. Also, seasonality in certain businesses can also impact this figure. As a sales team and company mature and attain scale, the variance in this figure should modulate, enabling the company to more consistently predict its growth over time.
There is no single way of maximizing sales velocity. These variables are codependent. The first step in deriving value from sales velocity is to consistently measure it. The second step is to determine the sensitivity of sales velocity to variables in your business. These sensitivities will change with time. For example, one year it might be much easier to increase prices then affect any of the other variables. Another year, the productivity of the paid acquisition efforts might swell lead volumes. Velocity is another way to measure the productivity of sales teams.