Rocket GTM 🚀 - Revenue Velocity
Before we get into this week's newsletter I wanted to share with you a podcast I was interviewed on. Below are some highlights or you can listen to the full recap here.
I talk about:
My background in finance and transition to the startup world
What makes an effective go-to-market strategy
Key drivers that have accelerated my career
Let me know what you think.
Now, let's get into this week's newsletter.
Revenue velocity is perhaps one of the most important metrics for scaling your revenue machine.
Granted, if you're at the zero-to-one phase of finding product market fit (PMF) , then it's not that important. But if you've found PMF and you're ready to scale then you should be tracking revenue velocity closely.
Rookie revenue leaders focus only on win rate. Rockstar revenue leaders focus on revenue velocity.
It's not just about how many deals you win, but rather the throughput of your revenue engine that matters.
Winning 50% of your deals is great, but if it takes you three years to win them and your contract sizes are small that's not good.
To see revenue velocity in action let's imagine that your sales team has:
30 new opportunities each month
With an $1,000 contract value
A win rate of 33.33%
And a sales cycle of 3 months
Your revenue velocity would be $3,333:
(30 oppos * $1,000 * 33.33%) / 3 months = $3,333
If you cut the sales cycle from three months to one month your revenue velocity would increase threefold to $9,999:
(30 oppos * $1,000 * 33.33%) / 1 month = $9,999
Revenue velocity represents the throughput of your revenue engine. It indicates how much money can your organization create in a given period of time.
In other words it's the effectiveness of your revenue engine.
For a growth-oriented company, the sales leadership might, with appropriate sales effectiveness disciplines, be successful in increasing each of the number of deals, average deal size and win rate by 10%, and decreasing the length of the sales cycle by 10%. This results in an increase in revenue of 48% without any increase in headcount – which is almost equivalent to adding half the number of salespeople at no cost. - Altify
As you can see, those rookie revenue leaders solely focusing on win rate are missing out on a bunch of leveraged actions.
Under each area of the revenue velocity formula there are playbooks you can run to improve your money making machine:
📈 Number of opportunities
💸 Deal value
🏆 Win Rates
🏃 Length of sales cycle
Let's get into some.
📈 Number of opportunities
Different go-to-market models will have different tactics for increasing the number of opportunities.
Inbound sales reps are less concerned with the creation of qualified leads , since marketing handles that, so they should be more concerned with improving the conversion of those leads to opportunities.
You could improve the accuracy of your lead scoring or account prioritization, shorten inbound response times, or improve rep's objection handling to pump up the number of opportunities created..
Since outbound reps generate their own pipeline much of their efficiency can be driven by increasing activity quantity or improving activity quality. Ensure your reps have crisp, clear messaging with great cold calling skills and invest heavily in coaching.
Increasing opportunity volumes is all about targeting the right person, at the right time with the right message.
Sometimes, however, increasing the number of opportunities in the pipeline is not an option since your sales reps may already be operating at peak capacity. In which case, you're probably best to prioritize one of the other four inputs of revenue velocity below.
💸 Deal value
After raising your Series A or B round it's not uncommon to have investors push you to increase your ARPA (average revenue per account).
Well, before you raised your Series A you were probably still searching for product-market-fit, meaning your focus was on building a product people want and ignoring everything else, including optimizing pricing & packaging.
Which means you're leaving a lot of money on the table.
Once you get traction however, it's a good time to pivot your focus from value creation to value capture by revisiting your sub-optimal pricing.
Pricing is probably the easiest way to get an instant overnight increase in revenue and there is often a lot of money left on the table. Just take a look at Twilio who's stock price jumped nearly 20% last month after switching to usage-based-pricing enabling them to capture more of the value they'd created.
As startups enter the scale phase it's common practice to look for ways to drive up ARPA. There are three ways you can increase ARPA effectively:
Charge more (price)
Charge better (packaging)
Build more things to charge for (product)
Pricing strategy is an exciting topic. I've seen first hand how price increases can actually lead to higher win rates thanks to optimized packaging. 🤯
If you want to read more about pricing strategy then I highly recommend "Monetizing Innovation" 👇
Monetizing Innovation: How Smart Companies Design the Product Around the Price.
🏆 Win Rates
As I mentioned earlier, new revenue leaders tend to over focus on improving win-rates. My hypothesis is that since sales people are highly competitive and they get more satisfaction by winning a higher percentage. Although this is not intrinsically bad it might be the best use of time.
There is often a mentality of "win at all costs" in sales which is extremely inefficient. You want to win the good opportunities quickly and get rid of the bad ones even quicker. Trying to win all deals at all cost defocuses reps and wastes enormous amounts of time on deals that were never going to close.
Instead of trying to increase win rates across the entire pipe, segment your ideal customer profiles and focus on increasing win rates here and reward reps for de-prioritizing low fit segments from the pipeline quickly.
For those of you who want to improve win rates I've found coaching on the following subject areas offer the highest leveraged results:
inclusion of key decision makers early on
selling strategic outcomes over product features
mastering the discovery call
and shortening sales cycles
Shorter sales cycles help improve win rates because it gives less time for things to go wrong.
Less time for competitors to enter the deal, other stakeholders to reprioritize the project, or even personal vacations to get in the way.
The longer a deal is open, the lower likelihood it will close. Period.
So in the words of Snowflake's CEO, Frank Slootman... "Amp It Up!".
🏃 Length of sales cycle
As we saw above, shorter sales cycles lead to higher win rates, but they're also important for another reason.
Overcoming capacity constraints.
Let's say your Account Executive:
Can handle 30 open opportunities at a time
With a $1,000 ARPA
Closes at a 33.33% win rate
With a sales cycle of three months
Your reps would be end up handling 80 open opportunities which is 2.7X more than their 30 opportunity capacity.
That's extremely stressful.
Running pipeline at multiples above capacity will lead to mistakes in the funnel and losing deals that you simply shouldn't. Not good. We want to avoid this.
Now let's say you coached your sales team to close in just two month's instead of three. They'd need to handle 50 open opportunities at any one time.
Much better, but could still be improved.
What would happen if we reduce the sales cycle to just one month?
The maximum number of open opportunities has now fallen to 20. Your sales team is now operating at just 66% of capacity. With all that spare capacity you can invest in driving more leads to your top of funnel.
Shortening the sales cycle actually enables you to increase the number of opportunities handled each month. It's a double whammy for your revenue velocity formula.
Wrapping it up 🌯
Revenue velocity is powerful. Start by mapping out your metrics and know where the money's coming from. Is it your deal size or is it your deal flow? Is it your win rate, or the time it takes to win a deal?
Instead of doubling your sales team, you could get the same results simply by shortening deal cycles and increasing ARPA by 20%.
There's nothing cooler than an efficient money making machine.
And that's why I love revenue velocity.