Everything You Know about Managing the Sales Funnel is Wrong A Market-Partners Exclusive Whitepaper The sales funnel has been the mainstay of selling since the first lead was identified and progressed into a successful closed order. If there is only one article you read on sales this should be it. This article takes all previous thinking about managing the sales funnel and proves them hopelessly incorrect. From sales professionals, to sales managers, in start-ups or industry giants, from sales training companies to CRM technology providers they are all wrong. If you think that the optimal shape for a pipeline of sales opportunities at any one time is a funnel you are wrong. If you think that the two most important sales funnel metrics are size and shape you are wrong. If you think that at any one time you need more sales opportunities at the first step of the sales cycle than at the later steps you are wrong. By taking thirty minutes to read this paper your perspectives about the sales funnel, and how to manage the sales process, will change. For those whose living depends upon building and maintaining a healthy funnel of sales opportunities this is a must-read. About Market-Partners Market-Partners is the leading independent consulting company focused on increasing sales effectiveness. We bring proven method, thought-leadership, and pragmatic expertise together in offering solutions that provide swift, significant, and sustainable results. We have been working with clients since 1995, from start-ups to industry giants, and have worked with literally thousands of sales professionals in more than 39 countries. For more information about our leading Customer Acquisition Management solutions, please get in touch with us at info@marketpartners.com, or 707-575-4712. 1
Is there anything more fundamental in sales and sales management than the sales funnel? It has been the mainstay of selling since the first lead was identified and progressed into a successful closed order. Let s take a quick look at a classical sales funnel, as denoted to the left. The concept could hardly be simpler, we have sales leads going into the top of a funnel, and then they progress through a number of, what we will call, selling steps until some of them become closed orders or customers. The idea is that however many customers we want to manufacture out of the spout at the base of the funnel, we need a greater number of leads at the top. This is obviously correct. Prospects may turn out to be not interested or unable to buy our offering. They may also turn to an alternative solution to meet their needs. Thus we have leakage through each of the successive selling steps. Unlike manufacturing where we strive to have zero defects, or fallout, the sales process is very likely to suffer from such wastage. In fact, I would always be suspicious of a 1:1 relationship between all possible selling leads and the ones that are successfully converted into customers. This would usually be a sign of not engaging in the marketplace to identify all possible opportunities. A sure way to longer term loss of market share as competitors grow their own sales funnels at your expense. Let s create a simple sales cycle, or sales process, and take a deeper look at how the sales funnel is used to plan and manage the selling activity. Let s just assume that there are four steps in our sales cycle, as shown in the diagram below. Lead Qualified prospect Proposal Negotiation and close Now let s make a few assumptions on the time it may take a sales opportunity to pass through each of these selling steps (or the cycle time), and what the conversion ratio may look like from each selling step to the subsequent step. For example, from the table below, we can see that we are estimating that it will take an average of five days to qualify a lead, and that 20% of all the leads we get will successfully move into our second selling step, that of qualified prospect. We can then see that we are estimating that it will take around 45 working days to work through selling step two with a prospect. This time may include waiting for budget cycles, organizing meetings with various individuals, and other such selling activities. For the proposal step, we are expecting a cycle time of 20 working days and, finally, 15 days for negotiation and closing the order. We are estimating that a third of all the proposals will move forward to the negotiation step, and then two-thirds of these will successfully convert to orders. 2
Selling Step Cycle Time (Days) Conversion Ratio 1. Lead 5 20% 2. Qualified Prospect 45 65% 3. Proposal 20 33% 4. Negotiation & Close 15 65% Total 85 We can then see that the total sales cycle length is estimated to be 85 days and, through some arithmetic, that a little less than 3% (2.79) of all leads will become orders. Given these estimates, we can now perform some simple arithmetic to build out the metrics of the sales funnel. In the table below we have added a column that illustrates the number of sales opportunities required at each selling step to generate one order. Selling Step Cycle Time (Days) Conversion Ratio Required for 1 Order 1. Lead 5 20% 35.86 2. Qualified Prospect 45 65% 7.17 3. Proposal 20 33% 4.66 4. Negotiation & Close 15 65% 1.54 Total 85 2.79% 1 We can therefore plan that we need 36 leads to generate one order. Here we can see the numbers that give rise to the notion of the sales funnel. Wide at the top with 36 leads, then we need 7 qualified prospects, 5 proposals, and finally 1.5 sales opportunities at the negotiate and close selling step to generate one order. If we were to graph this we would see the shape of the traditional sales funnel wide at the top and then tapering down to the spout of orders at the bottom. Before we go any further, let s share a huge disclaimer. Not for one moment are we suggesting that by some magic if we tip 36 leads into the top of the sales funnel we will automatically get an order out 85 days later. Clearly this is not an exact science. However, we can t fly blind and just run a business on hope and a prayer. So we make estimates based on prior knowledge and experience. In this example, we are saying that it is very unlikely that the sales cycle would be 30 days or so, and equally, it is not likely to be 150 days. These are only estimates. But, as business managers we have to plan with something. Strangely enough, sales of a particular type tend to follow certain trends; it is not a random process. The reasons for this are understandable and logical and are further explained in another paper. 3
For the sake of our example, let s now assume that we have an annual sales target of $500,000, and an estimated average sales order size of $60,000. Given that, we would need to close eight orders in the year ($500,000 divided by $60,000). Once again, sales is not an exact science, but for planning purposes we can say that we need some eight orders as opposed to two or 22. If our planning estimates are off, we would then need to adjust the plan, but at least we have some objective way to look at the selling task at hand. The table below then completes the picture to show how many sales opportunities are required at each selling step to make our annual sales target. Selling Step Cycle Time (Days) Conversion Ratio Required for 1 Order Required in Pipeline 1. Lead 5 20% 35.86 298.85 2. Qualified Prospect 45 65% 7.17 59.77 3. Proposal 20 33% 4.66 38.85 4. Negotiation & Close 15 65% 1.54 12.82 Total 85 2.79% 1 8 Undoubtedly we will need 300 leads to be successful. If we only have 100 we may be in trouble, and if we have 500, given that our other assumptions are reasonably accurate, we should be in good shape. This is all well and good. The fallacy is at the next step a leap of unsound logic that sales managers, corporations, sales training companies, and CRM suppliers are all running afoul of. The numbers in this table represent the number of sales opportunities that are required to pass through each of those selling steps in the place of a year, not at any one time. Why do I make the difference? The most important reason to draw this distinction is that sales professionals are looking at what is in their sales funnels at any one point in time. It s a simplistic notion to think that the sales funnel is shaped like a funnel at any one point of time and a dangerous one at that. Let s look at this a little closer, and bear with me through the logic I promise it will be worthwhile. The secret is all about flow. Sales opportunities flow through the funnel, or let s start calling it a pipeline, rather than being static. For example, if you started a year with 300 leads, and nothing else, in the example above, 85 days later you would have your required eight orders. Those 300 leads flow through the pipeline and, again using the above assumptions, five days later, 60 of them have become qualified prospects. Like the proverbial python eating the pig, those sales opportunities would flow through the sales pipeline to eventually become eight orders 85 days later. Obviously this would not be a practical or optimal way in which to plan a sales pipeline. You have a full year to achieve the eight orders, and it would be unlikely that you would start with 300 leads and not replenish the pipeline with any new input. Let s then introduce the notion of input (the number of new opportunities being added to the pipeline) and flow (the way in which existing opportunities move through the pipeline) to the equation. 4
In the table below we have an additional column that illustrates the opportunities actually required, at each step of the sales pipeline, at any one time. You see that, at any one time, we need six opportunities at step 1, 10 at step 2, 3 at step 3, and 1 at step 4. Hardly the shape of a funnel! The optimal, what we could call pipeline loading, looks more like a diamond than a funnel. Selling Step Cycle Time (Days) Conversion Ratio Required for 1 Order Required in Pipeline Oppty s Required at Any One Time 1. Lead 5 20% 35.86 298.85 5.75 2. Qualified Prospect 45 65% 7.17 59.77 10.34 3. Proposal 20 33% 4.66 38.85 2.00 4. Negotiation & Close 15 65% 1.54 12.82.74 Total 85 2.79% 1 8 19.82 If we are trying to manage the sales pipeline to look like a funnel (i.e., to have more sales opportunities at each step than the successive step) we are going to be wasting a lot of time and pursuing a highly compromised approach. It may be that you are now starting to look at the sales pipeline in a different way. Rather like one of those optical illusion drawings that can be viewed from a different perspective to see a different picture. It may be that you thought you understood that the sales pipeline should look like a funnel, but now you are seeing it differently. Before discussing the new way of looking at the sales pipeline, let s looks at one more fallacy of the old way. As a sales manager you may see that a sales person s pipeline looks healthy. For the sake of the argument we may imagine a sales pipeline that has 15, 8, 5 and 2 sales opportunities at each of the four selling steps that we previously described. This may seem like a healthy pipeline. Obviously it would therefore appear as goodness if, in a month s time, the same individual s pipeline is now comprised of 16, 8, 5, and 2 sales opportunities at the sequential selling steps. Herein is the fallacy, though. What if there has been little or no movement? That is, the 15 sales leads that were in the previous month s pipeline are still at this step, with only one added to make the pipeline now 16. From this example we see the total fallacy of only looking at the size and the shape of the sales pipeline. The optimal shape is likely not a funnel and the size implies nothing if not analyzed on the basis of the changes over time, or flow. From this new view of the sales pipeline we can see that the most important metrics become input and flow. These are the two most valuable indicators of the health of a sales pipeline, and they are the leading indicators for sales results. The size and shape of the sales pipeline are simply the result of the input and flow and are not, in themselves, the leading indicators. 5
Input and flow are the leading indicators that sales managers must inspect and manage to maximize their success. Unfortunately, today s CRM systems do little to help sales managers in this capacity; in fact they continue to support the old way in which to view the picture. They provide graphics of a sales pipeline showing the size and shape and comparing it to the ubiquitous, but erroneous, funnel. They are wrong on two accounts. Firstly, they are supporting the notion of the optimal sales pipeline being shaped as a funnel and, secondly, they provide no input or flow information. They provide a static view of the sales pipeline so the sales manager is left to their own devices to divine what has changed and moved. It would be my hope that this article may have changed your own perspective on how to manage the sales pipeline. The benefits of letting go of the old notion of managing the size and shape of a sales funnel, and moving to the new indicators of input and flow cannot be overestimated. Simply stated, input is the number of new sales opportunities that are being added to the sales pipeline over time. In the example we looked at above, where 300 sales leads are required over the one-year period, we can see that we need an input rate averaging one new lead being added every working day (or more accurately, one lead added every.87 of a day, calculated by taking the number of working days in the year, and dividing that by the number of leads required in that same time period). We can then see that the flow would be that each lead should be qualified and either moved forward or out of the sales pipeline, in this particular example, in five days. It is by managing the number of new sales opportunities entering the pipeline, and the flow of the sales opportunities from one selling step to the next, that we can maximize success. 6