Is Your Sales Funnel Misleading You?
Contributed by Charles Besondy
One thing Marketing and Sales managers can agree on is that it is extremely helpful to represent the lead process as a sales funnel (or pipeline) consisting of stages and conversion rates. Managers can (and do) fall victim to this tool if they aren’t careful, however. The old adage about “garbage in – garbage out” applies as well to funnels as to databases.
Here are the most common mistakes when creating a funnel model.
- Defining the stages based on internal processes and definitions rather than on the buyer’s journey
- Ignoring the time required for buyers to advance from one stage to the next
- Defining the first stage of the funnel as the point when Sales receives a lead
- Ignoring the buyers who entered the funnel, but didn’t progress
- Miscalculating the average deal size
Any one of these errors can sink a funnel model. The sad fact is too many companies use a funnel to understand and model the revenue process but the model is misleading them because they’re unknowingly making one or more of the mistakes.
Time is Not On Your Side
In 1964 the Rolling Stones recorded the ballad, Time Is On Your Side. I like the tune, but time is not a friend of the funnel modeler if it is ignored. Time is such an important variable in a funnel model, and is so frequently over looked, I’ll devote the remainder of this post to discussing it. To do so will require a little math. I’ll present an example that makes the point crystal clear.
Burritos and Funnels
Let’s say Jane, the bright and talented marketing director for ABC Software is having lunch with Darren, the dashing and effective sales director. Between the chips and salsa they are noodling on a napkin. A funnel is taking shape complete with stages and conversion rates. Jane whips out her smart phone from time to time to use the calculator. By the time the 100% organic burritos arrive at the table, Jane and Darren have a pretty good idea what the funnel needs to look like for the coming year. Or so they think. Jane and Darren are about to step into The Funnel Zone (with apologies to Rod Serling and the Twilight Zone).
Let’s brush off the chips and salt from the napkin and take a look at what they have drawn.
- Revenue goal for new business, not including revenue already contracted is $2.1M.
- The average order size is $10K
- The revenue funnel contains 10 stages for which the conversion rates are known.
- Early in the year they need to close 10 deals a month; this increases to 25 deals by the Q4 as the monthly revenue target increases.
- Jane calculates that based on the number of deals required to close and the conversion rates she’ll need to bring 11,253 buyers into the funnel who have the problem that ABC Software solves. That’s roughly 938 interested names per month.
Jane and Darren are feeling pretty good about their work by the time the tab arrives for their lunch. They know how many deals need to close each month and what volumes need to exist in the funnel. (There are several problems with their model, but I’m only going to focus on one right now). They head back to the office to share the results of their working lunch with the team.
Can you spot the problem with their assumptions and funnel model?
What about time? Their funnel math works if buyers traverse the entire funnel within 30 days. In other words, it works if an average of 938 names are brought into the funnel on the first of every month and an average of 18 are closed from that population by the last day of the month. But, this is not the case for ABC Software, nor is it for most software companies with an average price tag of $10k. The lead and sales process is much longer.
In the case of ABC Software the average deal closes eight months after the buyer’s name is first captured. Sure some deals close faster, others slower, but ABC’s data shows the buyer’s journey averages 8 months.
What happens to Jane and Darren’s model when we factor the time lag of various stages? To find out I entered a value for the elapsed time of each stage into a funnel calculator. I gave each stage a value between 2 weeks and 8 weeks, totaling 8 months. The calculator presented a much different picture than what Jane and Darren had concocted over lunch.
Now, instead of needing to bring 11,253 interested buyers with a problem into the funnel, Jane must capture 15,539 for the year, or 38% more names in order to generate the same number of deals each month.
If Jane and Darren had built their revenue generation plan based on the 11,253 names rather than the 15,539, they would have consistently missed their targets.
The moral of the story is to always build time into your funnel model. And don’t mislead yourself by only including the elapsed time for the bottom stages of the funnel controlled by sales. In many companies more time is spent bringing names into the funnel and advancing them to a qualified lead status, than the time necessary for sales to work and close the deal.