You don’t have to own flowy robes and crystal balls to see the future. A reliable forecasting method in place can be your clairvoyant. That’s essentially the whole idea behind revenue forecasting.
I’ve seen companies spend weeks at snowy mountains and ski resorts spending all the day indoors trying to forecast for the coming year and yet, forecasts remain forecasts and the actual scenario turns out like a ski-resort hit by a blizzard – zero visibility and not the faintest idea of what’s going on.
Sales as a metric isn’t the best indicator of growth. Mostly because sales reflects the past. The sales forecast is an exercise of derivation. You derive the forecast based on momentum on the ground. Leads! Leads are the leading indicator of your sales.
Sales numbers are lagging indicators because the leads would’ve been created months ago and closed now. Sales number is the night before the blizzard. Even if the sales cycle is short, there is a substantial time gap between when the lead was created and when the deal gets closed. The pipeline isn’t dependable either. Reason being, it all boils down to how optimistic your sales rep was feeling when s/he put the lead there. And sales reps are optimistic. You hire them for that trait!
More often than not, revenue forecasts go unmet. An over-optimistic approach isn’t going to cut it. But, being too practical, being overly pessimistic or too skeptical isn’t going to work either. So, is there any metric that takes care of all the important aspects and helps you reach a realistic forecast? Yes.
Enter: Qualified Lead Velocity Ratio (LVR) – How fast are your leads growing? To eliminate the rat-race for quantity, only qualified leads are counted. It is real time. With a good sales team, and a focus on growing your LVR, hitting your revenue goals is easy. If your month-to-month sales forecast graph has to trend up and to the right, the knob you turn to make that happen is ‘lead velocity’.
How do you measure ‘lead velocity rate’?
Sales growth is supposed to track an increasing LVR. If your LVR isn’t growing as per your plans, you can safely and accurately tell that the forthcoming months or quarters are not going to look good in terms of sales numbers.
If you are an engineer like me who sells now for a living, LVR brings the fond comfort of mathematical precision.
This is how an ideal LVR-Sales relationship should look. Any increase in LVR that month impacts the sales the next month. If your sales team celebrates a good month in September but there aren’t many qualified leads in the same month at the top of the funnel, it reflects in October’s sales numbers. But there are times when an increase in LVR doesn’t lead to growth in sales the consecutive month.
If your sales numbers are not impressive, it just could mean three things.
- Your sales team isn’t closing efficiently. There has been a change in the team or their quality is declining. Either way, if the sales revenue is going to decline, you have a problem.
- If your sales team is able to convert the top of the funnel to closures with the same level of historic effectiveness, then you could look at the top of the funnel, which is filled by your marketing channels. Lead volume is a problem then. If the lead volume isn’t a problem, then lead quality, most definitely is (because remember – we consider only qualified leads when we calculate lead velocity).
- Sales problems are relatively easy to decipher. Marketing problems aren’t. Leads slow down or become flaky for reasons outside of your channel performance. Your underlying market conditions could have changed. Your product might not have kept pace.
Whatever the reasons might be LVR helps you predict revenue and gives you directions to follow to investigate bottlenecks.
Can LVR be deceiving? Yes, anything that can be interpreted can be misinterpreted too, right? LVR takes into account the number of qualified leads. But what about that one golden deal vs 10 minor deals? LVR ignores the lifetime value of the prospect.
To ensure the integrity of the LVR metric, you should consider only qualified leads. If you are generating leads for a SaaS company it’s easy to do lead scoring and assign a quality score to a lead. If you are working on leads for an ERP product sold to retail or e-commerce companies, your leads might come from ‘feet on the street’ efforts. How do you qualify your leads effectively?
Watch out for the next post in this series!