August 31, 2015
The sales division of a manufacturer is working 300 sales opportunities, each averaging $12.5 million in value. The win rate is 8% and the average sales cycle is 30 days.
This sounds like details for a good GMAT question, but the stakes here are real.
What’s at stake? A metric called sales velocity – the increasingly critical measure of how much revenue a company is generating, and how fast.
Sales velocity is determined by multiplying the number of prospective deals, average value of each deal, and win rate, then dividing by the average sales cycle expressed in days:
For a company pursuing 300 sales opportunities, each averaging $12.5 million in value, a win rate of 8% and a sales cycle of 30 days – sales velocity equals $10 million a day.
While “sales growth” charts revenue quarter-to-quarter and year-to-year, sales velocity measures it by day. When immediate action is needed to invigorate revenues, typical quarterly and annual measurements come entirely too late.
Perhaps the greatest value of tracking sales velocity is the focus on “length of sales cycle.” While most sales organizations understand the need for leads, higher deal values and better conversion rates, too many ignore the disproportionately high value of shortening the time between the sales pitch and buy order.
Take the same benchmarks outlined above, cut the sales cycle by just 10%, and realize an additional $1.1 million per day in recorded revenue.
What can companies do with this “money-per-day” metric?
First, they can justify honoring deals, or rejecting them, once sales reps have negotiated terms. By focusing on revenue per day, companies can make smarter, faster decisions.
Secondly, analyzing sales velocity yields insight into how quickly products move through the sales funnel, allowing companies to more effectively manage inventories and boost free cash flow. Supply-chain aficionados will recall 2009, when Goodyear’s $1 billion inventory reduction drove a 132% gain in Q4 net income.
Evidently, the lesson taught by Goodyear and other supply-chain innovators hasn’t fully caught on. In a recent survey of CEOs, most say their companies carry 25-40% more stock than needed. Accelerating sales velocity would help mitigate the problem.
How to Accelerate Sales Velocity?
Boost win rate: Arm your sales teams with data – both current and historical – and analytics that shed light on competitive offerings and market-segment trends. You’ll glean a variety of compelling insights: Where do the best cross-sell opportunities lie? Which customers appear poised to defect and what can we do to prevent their defection? And which of our sales reps are contributing the most to profitable growth?
Increase average deal size: The right data, and knowing how to use it, will make a material difference. Equip sales reps with win-loss, compliance and pricing data to earn a negotiation advantage. Be prepared to identify price, profit, and margin opportunities for any slice of the business. Impose a single rule-based system driven by the most salient data.
More importantly, make sure that no rep leaves a negotiation without knowing: Have I charged the right price?
Shorten the sales cycle: Much of this comes down to governance and control. That is, own the ability to evaluate pricing strategy on every deal.
Let’s not forget that shortening the sales cycle also comes down to the rep’s ability to sell not just product but perceived value. Train your sales team to sell not just the product but also what it enables, why it’s unique, and what makes it compelling.
Boost win rate, increase average deal size, and reduce the sales cycle. Even if the collective impact of these actions does nothing to increase the number of sales opportunities. If you succeed by just 10%, you’ll accelerate sales velocity by 34%.
Track sales growth, by all means. But Don’t Ignore Sales Velocity.
On October 27, 2014, while fighting a takeover bid by Canadian drug maker, Valeant, Allergan CEO David Pyott appeared on CNBC to share his strategy for fending off the hostile offer. It boiled down to two words: sales growth.
“Unprecedented sales growth has made this the best quarter in the history of Allergan,” he said. The implication: If it ain’t broke, why fix it by handing the keys to Valeant?
Embracing sales growth seems obvious; after all, flat revenue weakens income, weak income hurts earnings, and sluggish earnings undermine shareholder value. So why the need for a 48-point Harvard Business Review headline that screams: “CEOs Need to Get Serious about Sales”?
“While CEOs play an active role in driving performance improvement across many parts of the organization,” says the piece, “sales has traditionally been neglected. That’s a big mistake.”
The most enlightened CEOs and CFOs are determined to avoid this mistake. They’re starting to look not just at “sales growth,” but also at the more-powerful metric of sales velocity. And that’s a good thing, because while there’s obvious value in tracking “revenue per quarter,” the commitment to grow “revenue per day” creates an incomparable sense of urgency across the enterprise.
Michael Hoffman serves as the Chief Commercial Officer at Vendavo, which provides industry-leading margin and profit optimization solutions that give businesses the confidence needed to take control of prices and discounts without sacrificing sales.