Chapter 5 - Sales & Commercialisation
IN THIS LESSON
Build a Funnel: How Much it Costs to Generate Sales
A “sales funnel” is a visual representation of the moving of potential customers through a company’s sales process. It is commonly depicted as an inverted pyramid (see Figure 1), capturing how each potential customer moves on a buying journey from the information-gathering and awareness stage (top of the funnel) to the ultimate buying stage (bottom of the funnel).
It is a difficult process to identify accurately and focus on the right people who will eventually buy products or services from your company. Yet, despite the difficulty, a sales funnel is highly useful to make the whole sales process more transparent.
Managing a sales funnel effectively is one of the most fundamental things for a well-run business to do. Not only will good sales funnel management increase sales, but it also enables a company’s leadership team to calculate and assess the cost of sales. Each stage along the funnel has a distinct cost, and the efficiency of the funnel affects a company’s financials, especially margins and break-even points.
The Ideal Use of a Sales Funnel
The funnel acts like a “filter” to help determine the best use of time, energy, and financial resources on the prospects with the most upside to turn into full-fledged customers. The ideal funnel guides high-potential customers downward, while simultaneously removing low-potential prospects who would simply clog up the funnel because they really have no intention to buy anything or subscribe to anything soon.
Think of the funnel in three parts:
The top of the funnel, which is the widest part, is where a company encourages everyone to explore the company, but there are no filters or qualifiers. People have looked at the website, for example, but they have taken no actions to show interest in the company–no sign-up or engagement yet.
The middle of the funnel is where a person moves a step beyond and acts. The level of engagement may be to download a white paper or sign up for a webinar. It shows interest and a minor commitment to learn more about your products.
The bottom of the funnel is where the strongest leads are converted into sales. These are people who have engaged with multiple pieces of content on your site, perhaps had a demo, and have engaged in a dialogue (even if only with a chat bot).
A good customer resource management (CRM) system is the most important tool to manage every stage of a sales funnel. It captures information on people from the start of the sales process and all along the way, providing transparency.
A Cost for the Pursuit of Sales
How well you manage the loss or removal of people at each stage along the sales funnel is also vital to managing expenses because you don’t want to waste money or time on people who will not buy now or ever. The funnel reveals these people, who are not interested in buying, to your company.
For example, if you have 1,000 new potential leads in your funnel on a given day and your company will spend time, energy, and money to nurture and qualify them from the top to the bottom of the funnel, you would have a higher cost “per lead” if you treat everyone the same–and do not make informed decisions to jettison low-impact buyers out of the funnel at each stage.
Your costs go up when you have your team calling “leads” that are not really leads. Do you really want the cost and burden of trying to turn everyone into a sale? No business leader, in his/her right mind, wants that. There is a cost to generating sales, and if you don’t manage the costs of the sales process–which is really an integration of marketing and sales activities–your monthly burn rate would sky-rocket and jeopardize the future of your company.
You also need to invest in marketing activities, such as Google ads, especially if your marketing costs are super-high because your company is scatter-shot trying to touch everyone everywhere, instead of being focused on potential buyers (or subscribers) with the greatest likelihood of buying now or within the next 12 months. If your costs are $15,000 per month in marketing spend and your sales are declining, there is likely a problem in your funnel and you are paying a higher price than needed; or to put it another way, your results do not justify you spend.
Save Costs and Forecast the Future through the Sales Funnel
One of the benefits of the sales funnel is lead prioritization, which creates cost efficiency in your sales management process. It allows you to disregard leads that have no value to you. This is a very intentional process, leaving virtually nothing to chance. In addition, a sales funnel that has accurate information helps you more accurately forecast sales for the quarter or beyond. The sales funnel adds predictability to the sales process.
Quantitatively, if you have a target to make $100,000 next month and the average sales cycle is 25 days in your business or industry, you will likely need at least $300,000 worth of sales opportunities (qualified leads) in your sales funnel before the month starts. Your company may have to pick up the cost of $107 per lead in this scenario (leads from Google Ads or sponsored webinars or trade shows), totalling over 2,800 people in the middle of your funnel.
Now, imagine if you took the 12,000 people who started out at the top of your funnel and included them in the middle of your funnel, you’d spend $1.3 million on sales and marketing–just for leads–but your sales would be the equivalent of 2,800 people. With this kind of exorbitant and wasteful cost, your company would go out of business before you finish doing the math in this example.
How to Avoid Mistakes
To avoid having your costs skyrocket in sales and marketing, the following are some tips to keep in mind:
Engage with potential leads more often and earlier in the process to identify the people who should be ejected from the sales funnel early on, so you get a more accurate funnel.
Align lead generation with conversion to true opportunities and sales.
Use a good CRM tool to help in sales funnel management.
Monitor the progress of each potential buy at each stage of the funnel (be intentional)
Alignment between Sales and Marketing
The first two-thirds of the funnel usually belongs to marketing to nurture the potential customers. Your sales leader/team and marketing leader/team should work closely together to ensure that the nurturing is done well, so that the right people (the most interested buyers) are cycled through the funnel. History has shown that alignment of sales activities and marketing activities usually helps a company improve their sales close ratios.
If you manage your funnel effectively and efficiently, you will not only increase your sales, but you will also keep your costs in control and focused on high value sales targets.
Through the Lens of Investors
While we focus a lot on costs, you can get funding on an initially unprofitable funnel. Costs for leads and conversions can fall over time due to various reasons such as network effects or increased brand awareness. A funnel with a lot of throughputs, even if it costs money for every customer, can be attractive to an investor. Extra capital can squeeze more efficiency and get it profitable down the line. Or for some investors, your customer base or funnel or other aspect of your business is so valuable to a strategic buyer that you never need to worry about profitability. The gains will come when someone buys you and plugs you into their ecosystem.
Robinhood managed to get millennials into the investing space. At that point, it didn’t matter if they had a solid revenue model or great margins. As the first brokerage to get the most valuable generation, they were laying the foundation for future success. Robinhood becomes to millennials what Fidelity was to boomers.
Uber and Lyft raised money based on their sheer volume of customers and growing market share. Amazon consistently lost money in its earliest days on purpose but was worth funding due to increasing market share. Finance, i.e., raise funds for equity, until the competitors wither away, then use your market power to squeeze a customer base with no choice. That is a viable business model that has been used effectively many times. It might sound like a criticism of Amazon’s practices, but we’re not going into judgments here.