A Bad Way to Boost Sales Velocity

Sales Velocity, the rate at which a sales team brings in money, is a common key performance indicator (KPI) of sales team effectiveness.

But, there are several ways to increase Sales Velocity and it is not necessarily obvious which ways are the best in a given situation.

Vainu.io, a software company that helps you to “identify the most valuable sales prospects for your business”, has produced a short ebook called ‘Mathematics for B2B Sales‘, which deals with Sales Velocity and ways to increase it.

They give the equation for Sales Velocity (amount of sales per time) =

 

Leads in Progress x Hit Rate x Average Deal Size / Sales Cycle Time

 

To show how it works, they give the example of a company that can acquire new customers through outbound marketing.

Outbound sales opportunities are generated by the company’s 10 salespeople, each of whom contacts 5 prospective customers per week. It takes prospects 4 weeks, on average, to either decide to become a customer or to decline to make a purchase. 10% of prospects (the ‘hit rate’) become customers while the other 90% decline. Each sale is worth $9000 on average.

The graphic below shows the mechanics of how this process works. Sales people generate Prospects who make a purchase decision, on average, in 4 weeks. 10% of these prospects buy a unit of the product, with an average deal size of $9000.

Since salespeople each generate 5 prospective customers per week and the decision-making time is 4 weeks, there are 20 active prospects (from outbound marketing) per salesperson at any given time.

Vainu’s ebook lists several ways to increase the company’s Sales Velocity. Some of these suggestions include:

  • hire more salespeople
  • improve the hit rate
  • shorten the sales cycle time

However, not all of these methods are equally effective. We have actually already seen this basic model before, in my earlier post ‘Deeper Into The Equation that Governs Your Sales Team’s Effectiveness‘.

The graph below shows what happens to Sales Velocity when in week 10 we decrease the sales cycle time from 4 weeks down to just 2 weeks.

The Sales Velocity (dollars in sales per week) spikes as the large number of Prospects in Progress make their purchase decision. But, as these people make their decision, the number of Prospects in Progress drops, and with it, the Sales Velocity returns to its base value.

That is, the ‘sales cycle time’ and the number of active prospects are mechanically related to each other. Changing either one of these numbers changes the other.

The term ‘Sales Velocity’ sounds impressive and the equation above makes it look like there are four key levers you can pull to increase it. But ultimately, the term ‘Sales Velocity’ is just another word for the dollar rate of sales ($ in sales per week) and the sales rate must be limited by the rate of generating prospects (the inflow pipe to the pool of Prospects in Progress), not the amount of time it takes for a new prospect to make a decision.

There might be some good reasons to reduce the sales cycle time, but hoping that doing so will increase sales or profit are not among them.

Advertisements



    Leave a Reply

    Fill in your details below or click an icon to log in:

    WordPress.com Logo

    You are commenting using your WordPress.com account. Log Out / Change )

    Twitter picture

    You are commenting using your Twitter account. Log Out / Change )

    Facebook photo

    You are commenting using your Facebook account. Log Out / Change )

    Google+ photo

    You are commenting using your Google+ account. Log Out / Change )

    Connecting to %s



%d bloggers like this: