The world of SaaS metrics is complex — you could spend every day measuring a different metric and quickly become overwhelmed with data without knowing for sure which number is the most important or the most likely to indicate solid growth. One metric that has been highlighted as a strong measure for growth is Lead Velocity Rate (LVR). In fact, Jason Lemkin, venture capitalist and founder of SaaStr, asserted in a 2012 post that the metric called Lead Velocity Rate (LVR) is “the most important metric in SaaS.”
Given the growing appeal of LVR as a leading indicator for growth, let’s consider what it measures, how to calculate it, and its drawbacks.
What is Lead Velocity Rate?
Lead velocity rate (LVR) is a metric that reveals how quickly qualified leads go through the sales pipeline and convert to customers. Basically, lead velocity rate assesses your business’ potential for long-term growth by measuring the month to month percentage change in the number of qualified leads. By instituting a procedure to systematically qualify leads, LVR allows you to forecast sales from one month to the next.
Lemkin prefers this metric over sales-related metrics because sales numbers are lagging indicators — defining what happened in the past. LVR, on the other hand, is “real time, not lagging, and it clearly predicts your future revenues and growth,” he says. That makes it a more strategically important metric than revenue growth.
“As long as you are using Qualified Leads, and you use a consistent formula and process to qualify them, you can then See The Future,” writes Lemkin.
You can count on your LVR to increase sales by a corresponding amount, and if it doesn’t, that provides an alert that something needs tweaking. A sales rate that is out of sync with your LVR indicates one of two problems with your business: Either a sales team that needs improvement or a problem with your product that is preventing sales from being as robust as expected.
How to calculate lead velocity rate
You can calculate lead velocity rate using a simple formula, but, as Lemkin points out, makes sure you are using only properly qualified leads in this equation. Here’s a formula provided by Mike Preuss, cofounder & CEO of Visible.vc:
Preuss agrees with Lemkin on the importance of this metric, and wrote:
“Lead velocity rate, when combined with factors like projected revenue, can paint a very vivid picture about the future of your business in both the short and the long term.”
This is the case because lead velocity rate is a steady indicator, unlike revenue, which may fluctuate for a variety of reasons. Since LVR is so straightforward and has such an immediate relationship with sales, it shows you exactly what to expect.
The drawbacks to lead velocity rate
Lead velocity rate measures something that isn’t yet of tangible benefit to your business; that is to say that qualified leads are great, but they certainly aren’t cold, hard cash. LVR is not a measure of actual revenue, but an indicator of potential sales.
If the LVR and sales process get out of sync, then the metric loses its reliability and becomes more useful as a method of pointing out a problem instead of as an indicator of your company’s growth. Make sure to track other metrics alongside LVR, such as conversion rates for marketing qualified lead (MQL) to sales qualified lead (SQL), and SQL to Win, so you can see if a discrepancy develops along the pipeline.
Another drawback to this metric is that you must measure it just right or it is meaningless. If you aren’t using qualified leads to calculate velocity, you not only waste your time in calculating it, but you may also hurt your business by harboring mistaken beliefs about your sales process and business growth.
If you get it right, though, LVR provides reliable and valuable information about your business. Lemkin nails it, saying:
“Hit your LVR goal every month… and you’re golden. And you’ll see the future of your business 12-18 months out, clear as can be.”