Early in a business’ development, focus tends to be on the next month or next quarter. Initially, this isn’t such a terrible thing as early on, cash flow is critical.
Cash-related challenges are the leading cause of early business failures. However, as a firm develops and matures, if it continues to focus on the near term, it can prolong the period when sales and cash flow are uneven.
The Sales Funnel
A useful way to think about the sales process is using the analogy of a funnel. Leads and prospects are dropped in the top of the funnel and sales drip out of the bottom of the funnel. Each level of the funnel defines a stage in the sales process – the lower they successfully go in the funnel the closer the sale. While initially the goal is to produce drips out of the funnel (i.e., closing sales as time goes on and as the firm matures), it is progressively more valuable to focus higher and higher in the funnel.
At each level, some prospects fall out of the funnel as we determine they are not likely to buy or are not qualified as customers. The number required at each level can be easily determined if you know your close rate at each level. For the final level, the ratio equals the close rate on proposals the business issues. The equation for each level of the funnel is this:
The # of opportunities required = the # required at that level x the number for each lower level.
Here is an example:
Prospects (5%) 32,000
Meetings (50%) 1,600
Pursuits (50%) 800
Proposals (25%) 400
The percentage next to each stage in the sales process is the portion of the opportunities at each level that proceed to the next level. In this example, 5% of the prospects can be turned into meetings. To get 1,600 meetings, the business needs to identify 32,000 prospects. Then, 50% of the resulting 1,600 meetings or 800 will result in pursuits where the customer expresses interest at some level. Of those pursuits, 50% or 400 will result in a request for proposal. Of the 400 proposals, 100 will be accepted by clients resulting in a sale.
By focusing on the proposal stage, searching for customers ready to buy right now, we create sales quickly. However, over time, in order to increase the number of sales, the business must focus higher and higher in the sales funnel beginning the sales process before customers even know they want the product or service being sold. In this way we capture more customers and are less dependent on lucky timing to find customers who are ready to buy right now.
Working your way up the funnel is largely marketing’s job and here are some steps you can take to work on the wide end of the funnel:
Begin by reviewing your current and past customers. Divide them into three groups; good customers, bad customers and the rest. Make a list of characteristics that make an ideal customer. What do they have in common? Profitability, ease of doing business, etc.;
Study past sales successes, particularly sales to customers that match your ideal customer profile that you would like to clone if possible;
Spend your marketing dollars and efforts in meeting more customers like these;
Curtail general, undirected efforts and focus those dollars and efforts on finding more customers that match your ideal customer profile; and
Conduct a sales post-game analysis by using an objective third party to interview both prospects that buy and those that don’t to identify strong and weak steps in the sales process.