Archive for February, 2010

Managing your sales funnel by the numbers

Funnel with 4 stages - named, qualified and near opportunity followed by an orderI’m sure you’re familiar with the concept of the sales funnel.  A lot of leads turn into a few sales, after a while.  It is the sales funnel that links assumptions about markets to the realities of revenue.

In several companies that sell directly to other businesses, I’ve found it very useful to quantify the funnel and the flow of opportunities through it.  That data is the key to managing sales activity.

There are three steps to scientific management of sales activity:

  1. Define the terms and use them consistently
  2. Quantify the chances of an opportunity advancing to the next stage and the time it takes
  3. Set goals for each stage based on the revenue goals

Defining Terms

The basic unit of sales activity management is an Opportunity.  Opportunities develop and get better defined as they mature. At the earliest stage, an Opportunity may represent nothing but a vague expression of interest in your product by one individual.  At the end it turns into an Order – a beautiful metamorphosis.  While there are many different schools of thought on how Opportunities develop and what to call the stages of development, I often use this simple 4-stage model.

  • Stage 1 – Named Opportunity:  At this stage we have at least the name and contact information for someone with an interest in your product
  • Stage 2 – Qualified Opportunity: Once a Named Opportunity has been qualified it advances to this stage.  One commonly applied set of criteria for qualifying an Opportunity is referred to as BANT.   BANT stands for Budget, Authority, Need and Timetable.  To be qualified you need to know that money is available (Budget) to purchase your solution, you know who is going to make the decision to purchase (Authority), what Need will compel them to purchase something, and when they need to have the solution (Timetable).
  • Stage 3 – Near-term Opportunity: Most companies set their sales goals by the month or the quarter.  If a Qualified Opportunity is likely to close in the current goal period, it is called a Near-term Opportunity.
  • Stage 4 – Order: This is pretty obvious – this happens when you have the written commitment from the customer.

Time to Advance: This is how long it takes for an opportunity to advance to the next stage.

Probability of Advance: Not all opportunities to advance to the next stage – some of them drop off.  This is the percentage of opportunities that are expected to advance to the next stage.

Average Deal Size: When an Opportunity turns into an Order, the dollar amount that the customer commits to your company on average is the Average Deal Size.

That’s it.  Those are all the terms we need. Now let’s describe the funnel numerically.

Quantifying the Funnel

After you track a sufficient number of your opportunities, you will be able to create a table similar to the following:

Stage

Average Time to Advance (weeks)

Probability of Advance

1 – Named Opportunity

4

30%

2 – Qualified Opportunity

6

60%

3 – Near-term Opportunity

3

80%

4 – Order

N/A

N/A

Average Deal Size = $34,500

Until you have some data it’s OK to set up this table based on your own best guess or based on the advice of people with experience in your industry. What’s really important is to implement a system to track the development of your opportunities so you can quantify your own sales funnel and manage your sales activity scientifically.

Setting Goals

You can see from the table above that it takes 13 weeks for a Named Opportunity to turn into an Order – this is often called the Sales Cycle. You also see that the probability that a Named Opportunity will turn into an Order is 14.4% (30% * 60% * 80%) – this is often called the Closing Ratio.  We have also noted that the Average Deal Size is $34, 500.

If you have nothing but 100 Named Opportunities in your funnel right now, you can expect revenues of about $496,800 ($34,500 ADS * 14.4 Orders) in 3 months (13 weeks).

Working backwards from a revenue goal, if you want to be able to generate $250,000 in revenues in June, you need to have 50 Named Opportunities in your funnel by the end of March (250,000/34,500 = 7.2 orders, which require 7.2 / 0.144 = 50.3 Named Opportunities).

It’s that simple and it is a tremendously powerful tool.  It allows me to cut through the fog of anecdotes and focus on the numbers that predict results.

How are you managing sales activity?  Leave a comment and share practices you have found useful at your startup.

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February 16, 2010 at 2:13 am 2 comments

How many companies get venture funding?

First-time technology entrepreneurs who are just getting started, here in Michigan at least, tend to believe that they need to raise money from venture capital firms. This represents the popular belief that venture funding is the gateway to technology business formation. Let’s call this the mind-share of VCs as a source of funding. Based on anecdotal evidence I’m going to estimate it at 90%.

This led me to a search for facts and here is what I found:

According to the MoneyTree Report published by PricewaterhouseCoopers and the National Venture Capital Association, in 2008, 1,171 companies were funded for the first time by venture capital firms.

According to the money tree report for 2008 first-time deals for 2008 were 1171 for 2007 were 1299 for 2006 1201 for 2005 1019 for 2004 921 for 2003 753 for 2002 836 and 2001 was 1213.

According to the Kauffman Index of Entrepreneurial Activity (KIEA) published in April 2009, over 6 million businesses were formed in 2008.

According to the Kauffman Index of Entrepreneurial Activity approximately 530000 new businesses were created each month

First time venture deals in 2008 1,771
Number of businesses created in 2008 6,360,000

Compared to my impression that VC mind-share is 90% among first-time technology entrepreneurs, the reality is that only 0.02% of new businesses are VC funded.

The KIEA does not break out high-tech businesses but categorizes businesses as low, medium or high-income potential. The high-income potential businesses are approximately 20% of the total. Comparing VC funding of first-time deals to the total number of high-income potential new businesses in 2008 we can estimate that only 0.1% are venture funded.

Where are you spending your time?  Take this short poll:


Sources:

MoneyTree Report
https://www.pwcmoneytree.com/MTPublic/ns/moneytree/filesource/exhibits/National_MoneyTree_full_year_Q4_2008_Final.pdf
The slide image is from a presentation found at:
http://www.docstoc.com/docs/DownloadDoc.aspx?doc_id=3764346

Kauffman Index of Entrepreneurial Activity 1996-2008
http://www.kauffman.org/uploadedFiles/kiea_042709.pdf

February 14, 2010 at 2:40 pm 1 comment


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