The 1 Overlooked Metric In Sales Forecasting

Published on October 4, 2023 by David Zhang

The 1 Overlooked Metric In Sales Forecasting

Sales forecasting is an essential process in business operations that enables companies to make informed decisions, manage resources effectively, and prepare for future growth. Forecasting sales is both an art and a science, requiring a fine balance of data analysis, industry knowledge, and intuition. Traditional metrics like lead quantity, pipeline value, historical conversion rates, and sales cycle length are commonly used as the backbone of forecasting methodologies. However, amidst these popular metrics is an often overlooked yet highly significant indicator: the Sales Velocity.

Sales Velocity is a metric that combines multiple elements of the sales process to give a comprehensive picture of how quickly a company is making money. It is the rate at which a business earns revenue from its sales efforts, accounting for factors such as the number of opportunities, deal value, win rate, and the length of the sales cycle.

Here is why sales velocity should be a core metric in your forecasting and how it can provide valuable insights for your business.

Understanding Sales Velocity

Sales Velocity = (Number of Opportunities x Deal Value x Win Rate) / Length of Sales Cycle

Each component of the sales velocity equation is a critical lever:

  • Number of Opportunities: The total number of deals in your pipeline that could potentially close in a given period.
  • Deal Value: Also known as Average Deal Size, this represents the average monetary value of each deal.
  • Win Rate: The percentage of opportunities that converts into actual sales.
  • Length of Sales Cycle: This is calculated from the initial contact to the final sale and reflects how long it takes to close a deal on average.

When you increase the number of opportunities, the average deal value, or the win rate or reduce the sales cycle length, your sales velocity increases, indicating that revenue is coming in faster.

Why Sales Velocity is Overlooked

Sales Velocity isn’t just another number to track. It's a holistic measure of a company’s sales health. So, why is it so frequently overlooked in sales forecasting?

  • Complexity: Sales velocity involves multiple variables. Many businesses focus on singular metrics that are easier to understand and track.
  • Misplaced Priorities: Companies may prioritize lead generation over velocity, presuming more leads will automatically equal more sales.
  • Lack of Awareness: Some sales teams may not be aware of the sales velocity concept and its benefits.
  • Inertia: Businesses can get stuck in 'what has always been done' and may hesitate to adopt new metrics or change existing processes.
  • Overemphasis on Volume: There’s a common misconception that solely increasing the number of deals can drive sales growth, overlooking the importance of deal quality and efficiency.

Understanding and improving Sales Velocity involves a comprehensive strategy to enhance each component without sacrificing the others.

Benefits of Measuring Sales Velocity

Sales Velocity provides a single metric that captures the efficiency and effectiveness of the sales process. By analyzing sales velocity, companies can better understand:

  • Economic Health: How quickly the company is turning opportunities into revenue.
  • Process Bottlenecks: Where slowdowns are occurring, whether in lead qualification, negotiation, or closing stages.
  • Sales Team Performance: How efficiently the sales team is working collectively to generate revenue.
  • Market Dynamics: Shifts in customer behavior or economic conditions reflected in longer sales cycles or lower win rates.

Better visibility into these facets allows for more precise forecasting and resource allocation. Sales teams can use this metric to fine-tune their strategies and processes, boosting overall sales performance.

Strategies to Improve Sales Velocity

When sales velocity is at the forefront of forecasting, several strategic approaches can be utilized to improve it:

  • Enhance Lead Quality: By focusing on targeting ideal customers and high-value prospects, businesses can increase the win rate and average deal size.
  • Streamline Sales Processes: Shortening the sales cycle by removing redundancies and accelerating decision-making can significantly improve velocity.
  • Sales Enablement: Providing the sales team with the tools, training, and content they need to close deals more effectively.
  • Pricing Strategies: Adjusting pricing models or creating bundles can raise average deal values without impacting win rates or cycle length.

Implementing Sales Velocity in Forecasts

Incorporating sales velocity into forecasting involves adjusting sales strategies to align with real-time velocity measurements. Here's how:

  • Data Integrity: Ensure the data that impacts sales velocity, such as deal sizes and win rates, is accurate and up-to-date.
  • Regular Analysis: Assess sales velocity regularly, perhaps weekly or monthly, to catch trends and make timely adjustments.
  • Balanced Focus: Work to improve each factor of the sales velocity equation in harmony, preventing adverse effects on other components.

Sales velocity offers a granular and dynamic view of your business's sales health, providing actionable insights for making strategic business decisions.

Real-World Implementation

Imagine an AI platform like Aomni that delivers personalization in sales at the click of a button. When integrating sales velocity as a key metric within Aomni's analytic capabilities, businesses can receive real-time insights into their sales operations. They can quickly identify where to focus their efforts—whether on nurturing higher-value opportunities, shortening the sales cycle with actionable insights, improving their win rates with competitive knowledge, or managing their pipeline more effectively.

As a result, sales teams become empowered to take precision actions aimed at not just increasing the number of deals but strategically accelerating revenue generation.

In conclusion, while Sales Velocity may not always receive the spotlight in sales forecasting, it offers unparalleled insights into the gains from every element of your sales process. By understanding and improving sales velocity, companies can shift from a simplistic, volume-driven sales strategy to a nuanced and highly targeted approach to revenue growth, ensuring sustainable business success in competitive landscapes.

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