The sales funnel is a highly useful management tool providing a means both for monitoring the efficiency of the acquisition process and holding staff to account. In order for it to work effectively it must be appropriately designed, reporting relevant information in a format commonly understood by all involved. The funnel must also be actively managed, with the outputs carefully interpreted and used to deliver guidance. Furthermore, the incentives of those participating need to be geared to ensure profit improvement.
The sales funnel is employed by companies to track the commercial opportunities that exist in their relevant market through to the ones that they manage to realise. The proportion of these commercial opportunities that move on to subsequent phases of the pipeline (e.g. ‘worldwide projects’, ‘accessible projects’, ‘calls for offer’, ‘offers submitted’, ‘orders’ etc.) provides a high level but valuable indication of sales process efficiency. This is usually expressed visually as a dashboard with corresponding percentage conversion rates through each commercial stage of the acquisition process.
Simplistically, the higher the pass through rate, the higher the implied productivity of the effort expended on winning work – though this does not tell the full story.
Capturing the right information to build an effective funnel
When building a sales funnel companies need to be careful of not falling into the trap of just using the minimum information they typically capture in their CRM system, which tends to be formalised data from the ‘call for offers’ stage onwards. Market potential and the number of accessible projects should be factored in to the conversion rate calculations and consequently these data must be integrated into the CRM system accordingly.
Without this broader view, the company may actually misdiagnose the most important failings of their current set-up. They may erroneously conclude that the conversion of offers to submissions is the problem, whereas it may actually be that they are not finding enough suitable projects in the first place, as was the case in a recent Simon-Kucher & Partners project example:
Our client believed that their revenue growth was being held back because they turned fewer offer submissions into projects than they believed they should, but this was a false conclusion. Analysis of the sales funnel actually revealed that their conversion rate was quite respectable. The deficiency in the process, however, was that they only found out about a fifth of the total projects for which they could realistically have bid. This pointed to the need to invest in the marketing or business development activities rather than the sales function.
Organisational alignment and commonly understood terminology
Collaboration between the sales and marketing organisations is a prerequisite of an effective pipeline and common understanding of what factors determine the status of a commercial opportunity also needs to be established. It is management’s responsibility to moderate this interaction.
This is particularly true in business-to-business environments, where the complexity involved in the buying decision is often high and interested parties are multiple. Frequently the point at which responsibility for a sale should pass from the marketing team to the sales team is not always evident. Once a common definition of the pipeline has been established and roles and responsibilities allocated, this diagnostic tool can then be used practically to improve profit outcomes.
Steering profit growth by use of the sales funnel
Simply having the appropriate information in a sales funnel will not in itself lead to optimal sales results. Leaders need to interpret the outputs carefully - which sometimes can be counter-intuitive - in order to provide effective guidance to their teams. They should also recognise the potential for conflict and address this, aligning the incentives of those who are involved in the process to drive commercial success.
Firstly, managers need to establish how effectively the organisation currently moves opportunities through the funnel. Simon-Kucher & Partners have worked with organisations with varied challenges - some have a tendency to submit offers for everything, others are unaware of many opportunities open to them, so the current situation and commercial processes needs to be established.
The transparency that results from a sales funnel also needs to be properly placed in context and there is no ‘one size fits all’ approach to developing Key Performance Indicators (KPI) targets, as each organisations’ optimal funnel will be unique. Moreover, the outcomes from having metrics can be interpreted in a manner of different ways, for example:
A low conversion rate from calls for offer into offers submitted may mean that too many viable bids are currently being screened out by internal guidance
A low conversion rate from offers submitted into incoming orders may imply insufficient rigour in determining the most suitable offer to the client
A high conversion rate of offers submitted into incoming orders is desirable in one sense, but may also suggest that the sales have conceded too much on price
Given the ‘grey areas’ in interpretation, it is evident that sales funnel metrics alone cannot exclusively determine the steering measures management needs to provide. In order to do so successfully, general managers must probe their commercial team further and overlay qualitative factors explaining variances. They should be cognisant that the use of conversion metrics can lead to ‘gaming’ which should also be taken into account.
Improving outcomes through shared incentives
One of the keys to success for an effective sales funnel is to link the targets and incentives of sales and marketing staff to multiple conversion metrics and not just the one most relevant to their area of responsibility. Targeting a single conversion metric, for instance the number of leads, will simply incentivise the generation of leads, regardless of their quality.
With a stake in the overall efficiency of the sales funnel, commercial staff across the various functions are better incentivised to act in the greater corporate good. As an example of how this works in practice, when salespeoples’ targets are partly dependent upon overall efficiency, then they are much more likely to invest time in shaping customer specifications at the call for offer stage, thereby ensuring that the proposals that go out have a much greater chance of success.