Sales Funnel Management: What You Need to Know to Forecast and Close Sales
By: Alex White
Effective sales funnel management enables a company to optimize efficiency while reducing costs by preventing time from being wasted on prospects and leads that just aren’t quite ready to commit. A sales funnel will also facilitate the tracking and gathering of important data, thanks to the well-defined stages within the funnel itself. As a result, a prospect’s progress can easily be charted, and any problems or issues can be quickly localized, identified, and resolved.
Typically, a sales funnel contains four key metrics:
- The number of deals in your funnel
- The average size of a deal
- The average percentage of deals that are won (close ratio)
- The average deal lifetime before its closed (sales velocity)
To measure these metrics as part of your overall sales funnel management, you need to develop stages for your funnel – as many or as few as you need. If you’re new to implementing a sales funnel a good place to start is with these five basic stages:
The trick to making the sale funnel work is to work it backwards. Start by determining what needs to be won; for example, if there’s a sales rep with a million dollar quota, you can determine how many deals need to be closed by dividing the quota by the average sale price.
Then determine the percentage of Proposals that successfully close from the prospects in the Proposal stage – that will tell you how many Proposals need to be made to win the number of deals to meet the quota. Keep working the numbers backwards – how many Demos turn into Proposals? How many prospects that have taken the time to learn more about your organization (Discovery) turn into Demos? What percentage of Leads move on into the Discovery stage? By this point you’re in a position to determine how many Leads it takes to result in the Wins that will meet the quota.
Once you understand the relationship between the numbers in each stage, you’ll be able to see where there are problems in your sales process. For example, if you need 1200 Leads to reach your quota, but only have 650 in the funnel, Marketing needs to ramp up activities to produce more Leads.
The beauty of all this is how proactive sales funnel management can reveal issues before they can become full-blown problems. Here’s a couple of examples. Perhaps you typically have a large percentage of Leads convert to Discovery (which might be better described as Discovery/Qualification because the Leads become qualified sales prospects in this stage) but then suddenly there are very few Demos. That may indicate that the marketing content being used to convince Leads to become Prospects may not be up to the job and needs to be reviewed and revised. Or say you typically get a large number of Demos converting to Proposals, but then a significantly smaller percentage of Proposals turning into Wins, this reveals a problem with pricing or something else in your proposal that you need to fix. Seeing how the Leads flow through the funnel and where they get stuck enables you to revise your messaging and positioning to keep the funnel flowing smoothly. This kind of monitoring, analysis, and revision will continue to build value for your company.
Using your CRM system to add even more value
Most humans are visual animals. When we see things represented graphically we’re better able to digest and understand the information being presented. By integrating your sales funnel with your CRM system you can slice your data in a variety of ways and get your sales information presented in real-time using easy-to-understand graphics.
Sophisticated CRM systems manage and manipulate centralized customer information (more on that in our next post) to provide a comprehensive sales environment picture. Let’s say you have an abnormally high number of losses in a particular stage. You can have your CRM pull up all the activities surrounding those losses in that stage – phone calls, emails, and all other forms of communication that happened between your rep and the prospect and begin to see where things went wrong so they can be fixed.
Forecasting accuracy: turning numbers into revenue
Once you start plugging numbers into your sales funnel for each stage, it becomes relatively easy to forecast with greater accuracy. Let’s say at the beginning of the quarter you have 40 Demos scheduled that typically convert at 50 percent, yielding 20 Proposals, which also have a 50 percent closing rate. That means you should be able to successfully close 10 Proposals. Your typical sales cycle takes a little under 90 days, so if each Proposal is worth $1000 you’ll have $10,000 in revenue heading your way at the end of the quarter. Pretty simple, right? But wait, it gets better.
As you continue to use your sales funnel and work out the percentages at each stage, your forecasting will become increasingly accurate. Using our example above, you will get to a point at which you can look at the number of Leads going into your funnel and predict with uncanny accuracy the revenue at the other end. You’ll also be able to look at blockages that may occur in the middle of the quarter and react to them in real-time to keep the funnel flowing and meet your numbers.
Whether you’re new to sales funnel management or a veteran sales professional well-versed in its benefits, it’s important to remember that a sales funnel is a living tool. If you use it regularly and aren’t afraid to tweak it as needed to meet changes in your organization or industry, you’ll find it’s a critical key to successfully growing sales.