Managing your sales funnel by the numbers

February 16, 2010 at 2:13 am 2 comments

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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Entry filed under: new venture, Sales Skills, startup.

How many companies get venture funding? Sales funnel management for scientific and engineering entrepreneurs

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