How many company retrospective meetings have you been to, where the sales team is alarmingly below their revenue goal for the quarter, but the sales manager tells everyone not to worry. “We have a few big deals in the pipeline that we’re working now, and they will probably close before the end of Q4,” he says confidently. Now, it’s statements like this that keep chief financial officers (CFOs) up at night. They’ll probably close? What does that even mean?
Unless there is an unbelievable amount of trust between the sales team and a CFO, sales managers saying they’re likely going to hit revenue targets is simply not enough. CFOs need the ability to accurately track and measure their pace of business, so they can objectively make projections on the company’s pace to hitting revenue targets. Unfortunately, a sales manager’s gut instincts do not really help at all with this.
Funnel velocity is the speed at which prospects and leads move through the revenue funnel. Being able to accurately track and measure funnel velocity is crucial to determining whether or not you will hit your revenue goals. However, many organizations are only measuring the velocity of leads once they become engaged, or midway through the marketing and sales funnel, while completely ignoring earlier stages of the funnel.
Funnel velocity, should not be confused with “sales velocity.” While funnel velocity measures how fast actual prospects move through your funnel, the term sales velocity actually refers to how fast revenue moves through your funnel.
In short, there are four major components to “sales velocity,” which can be seen below.
In the above equation, in order to determine sales velocity (sv), you need to also know:
- Average number of Qualified Opportunities (O)
- Average Win Rate, in % (R)
- Average Deal Size, in $ (S)
- Average funnel velocity, in days (L)
Consider the example below:
If we know that our average number of qualified opportunities in a month is 100, our average deal size is $1,000, our average win rate is 35%, and our funnel velocity is 30 days, our sales velocity is $1,166.67. Essentially, we can say that, using these averages, that the business is receiving $1,166.67 of pipeline value every day from the marketing and sales teams.
Looking at the equation above, you’ll notice that the one variable that affects your sales velocity the most is funnel velocity. For example, if our funnel velocity in the above scenario was 32 days instead of 30 days – only a change of two days – our sales velocity drops to $1,093.75, which is a difference of $72.92 a day. While this might not seem like a lot, dilating our funnel velocity by only two days equates to a difference of over $2,000 in monthly revenue. So, how do we go about measuring our funnel velocity, and how do we use this number to our advantage?
Not So Fast
Even before you start taking a look at how you’re measuring funnel velocity, you need to make sure that you are even able to measure velocity in the first place. Most CRMs – Salesforce included – do not natively track when a lead enters or exits a stage, or how long a lead has been “stuck” in a particular stage. Download our Velocity Cheatsheet to calculate funnel velocity by stage once you turn on field tracking history for the necessary standard objects and custom objects.
Effectively measuring your funnel velocity is more than just knowing your average time to purchase. It’s also important to consider how long a lead stays at each stage of a marketing and sales funnel. Suppose you know that your average time to purchase is 30 days. This is a great thing to know: You know that what your sales team is working on now will affect revenue in a month, but do we know how long a lead is sitting at any particular stage in the funnel? Suppose that in this 30-day sales cycle, we find that leads are spending an average of 19 days at the bottom of the funnel. With this information in hand, an organization can ascertain why leads are getting bottlenecked at this stage, and also take steps to move leads through this bottleneck faster.
You should also be measuring any changes in average time leads spend in any particular stage of the funnel. This serves two purposes, depending on the movement that you’re seeing.
- If time in any stage starts to increase, you can quickly start troubleshooting that particular part of the funnel and take steps to correct any problems that are happening. Remember, even an increase in a few days can impact monthly and quarterly revenue drastically, so it’s best to watch your funnel velocity metrics like a hawk.
- If time in any stage starts to decrease, this will be an effective metric in determining an activity’s overall efficacy. For example, if the amount of time leads spend at the bottom of your revenue funnel is trending downwards, you might be able to conclude that the case studies your marketing team is producing aimed specifically at these leads are effective in closing deals faster.
Measuring Funnel Velocity Means Accurate Projections
If funnel velocity is the largest determining factor in time to revenue, being able to measure funnel velocity allows CFOs to project a company’s quarterly income comfortably, without having to rely on guesswork, predictions and the good will of the sales manager. Having a solid grasp on the metrics that affect pipeline value and funnel velocity allows for a more scientific approach to making revenue projections. Most of all, if a business exceeds or falls short of a revenue goal, having a granular look at the sticking points or bottlenecks in a funnel shows where performance needs to improve, leading to a more efficient and streamlined revenue funnel.
After all, interpreting a revenue funnel is a science, and there is no room in science for “I’m pretty sure…” or “I bet…”
Start Being Scientific
Download our digital book, “Revenue Funnel Science: Optimizing Your Marketing & Sales Funnel,” to not only speed up your revenue, but increase conversions and leverage other key revenue funnel metrics.