May 9, 2011

The Great Debate – How Big Should Your Sales Funnel Be?

Recently there was an interesting discussion on the question of “3X as a targeted sales funnel size?” in Mark Seller’s LinkedIn Discussion Group “Funnel IQ”.  Several people offered opinions ranging from 2-3X all the way up to 7 and 10X.  Looking at this question from the perspective of the “science of selling” and based on a six Stage Buy Cycle Funnel using an optimistic sales position this value is surprisingly more likely in the range of 17X.  It could be much higher depending upon how the salesperson is positioned, the mix of opportunities within his/her territory, and win rates within his/her accounts.  This discussion looks at these Sales Funnel metrics in more detail.

A Sales Funnel model is used that is based on a client’s buying process – the “Buy-Side”.  [See Mark Seller’s book “The Funnel Principle” for more background on this approach.]  A bit of definition will assist in evaluating the assumptions and conclusions that follow.   The Funnel used in this discussion consists of following six Stages:
  • Define Business Problem – where client organization becomes aware of a business problem or a business opportunity of which they can take advantage; major outcome is one or more client buyers or influencers agree there is a problem and to sponsor its further evaluation.
  • Define Business Case – where a business case is prepared by client organization; major milestone is approval by the appropriate client buyers.
  • Secure Funding Commitment – where client organization evaluates this Case versus other competing Cases; major milestone is scare funding allocated to this Case.
  • Define Decision Criteria – where client buyer’s project team defines in more detail their business requirements and their criteria for selecting a successful vendor to provide services and /or products; major milestone is Request for Proposal released to list of approved vendors.
  • Evaluate Alternatives - where client buyer’s project team receives vendor proposals, evaluate against selection criteria (including presentations from selected finalists) and make a recommendation to client buyer of successful vendor bidder; major outcome is selected Bidder.
  • Complete Vendor Selection – where client buyer’s project team with support of other client organization resources (e.g., Legal, Finance) negotiates final contract with chosen vendor bidder; major milestone is contract signed by both parties.
[For those not familiar with the first three Stages please check out Sharon Drew Morgen’s work   for some insights.]

Scenarios and Assumptions

To illustrate the Funnel metrics a simple model was developed that looks at the number of opportunities required in one Stage of the Funnel described above in order to advance a sufficient number through to the next Stage to ultimately “pull-thru” a single opportunity as won.  The following key assumptions were used in this model:
  • Salesperson engages with client at beginning of client’s buying business process with situations which are primarily net new opportunities.
  • Salesperson’s objective is to win $1 mil in a time period.
  • Average opportunity size in Salesperson’s Funnel is $1 mil in value
  • Salesperson’s Funnel is fully populated – that is salesperson is not in a startup situation.  [In a 6 Stage Funnel if client takes 1 month to proceed thru each Stage then first win is not likely until 6th or 7th month.]
  • The more influence the salesperson (or sales organization) has on the outcomes early in the client’s buying process the more successful the salesperson is in winning, more often.
This discussion considers two scenarios that illustrate Funnel metrics based on how the salesperson and sales organization are positioned within the client’s organization. 
Scenario #1 – Well Positioned Salesperson

The salesperson knows client’s business, is able to bring visibility to a problem or opportunity that client was not aware of, is able to describe an interesting solution that builds interest with client buyers  

The salesperson has influence on the outcomes of each Stage which results in a certain number of “opportunities” advancing to the next Stage in client’s process.  For this scenario these “Pull-Thru” rates are highlighted in red in the column labeled “#of Ops that advance to next Stage” in the table to right.


Outcomes:
  • To drive a $1M win the salesperson would need a Funnel that is about 17X (where X is $1 mil).
  • That Funnel would have the profile illustrated in the chart below.
  • Based on several assumptions about amount of effort to pursue each opportunity the salesperson is likely to secure the win within a 1 to 1.5 month interval!   In other words the fully loaded Funnel in this Scenario if worked consistently could drive a $1 mil win every 1 to 2 months.  This assumes that client decision making is not a constraint. 
  • During this period of the win the salesperson would have to work 17 opportunities to Pull-thru a single win

Scenario #2 – Salesperson “Follows” Client

In this Scenario the salesperson is less well positioned within account; understands what is going on, but has little to no influence on outcomes in early Stages, and faces strong competition in the later Stages.
In reality salesperson is likely just tracking the opportunities in these early Stages and more focused on building a relationship with the client buyer or influencer participants rather than influencing the outcome, and as a result likely less differentiated from competition.
The “Pull thru” rates are assumed to be 1 point less in each of Stages 1 thru 4 than those in Scenario #1, and Stage 5 rates 2 points less as salesperson’s solution is likely less differentiated.
Outcomes:
  • To drive a $1M win the salesperson would need a Funnel that is 36X
  • Based on similar assumptions about the amount of effort to pursue each opportunity as in Scenario #1 it would likely take a 2 month interval to secure this win!
  • The salesperson would have to work around 44 opportunities in that interval
What Can Be Learned From This Analysis?

  • A few changes in the “Pull-thru” assumptions quickly drive big swings in the number of Funnel opportunities required to win an opportunity of the same size.  Along with this goes increased salesperson workload.  This very quickly goes from a manageable to an unmanageable situation.
  • Also, and perhaps more importantly, as the Pull-thru numbers become less optimistic the interval of time to win an opportunity of same size could be extended out by several times.  This could result in quite a swing for a salesperson who is expected to win $1 mil each month, but finds that his/her run rate is closer to $1 mil every 2 to 3 months.
  • Time management becomes even more critical for the salesperson and sales manager. 
    • For example; as a general rule if a salesperson’s target is $1mil for a period then he/she should avoid chasing one-off $250k opportunities. 
    • Salespeople should be very realistic about their chances of winning an opportunity.  If the chances are low then abandon.  In other words, if you are going to lose it is better to lose early!  This is what I believe Peter French referred to as “discerning engagement”.
  • In a highly competitive and complex business environment most salespeople are more likely closer to Scenario #2 than Scenario #1
  • The nature of the opportunities in salesperson’s Funnel can affect the metrics as well.  Renewal business or additional phases of a major multi-phase project opportunities can have different metrics.
  • Sales organizations need to be realistic about the territory when setting quota.  If their assumption is close to Scenario #1 when in reality the salesperson is in a situation which is more like Scenario #2 there will likely be a major gap in expectations.
  • Operationally it becomes critical for the sales organization to look with confidence at the opportunities in their Funnel of knowing that the reported data reflects the reality of the situation, and to allocate sales resources to those high potential opportunities. 
    • Experience teaches us that many salespeople and some sales managers feel a sense of comfort in having a large pipeline even knowing that it is bloated with opportunities that will never happen. 
    • Salespeople must be diligent in reporting the status of opportunities in a consistent way and eliminate the need for sales management to second guess the salesperson!
  • Sales strategies for both the salesperson and sales organization become very important in being successful in this reality.  Strategies could include: focus of services/products offered, positioning in client’s mind, pricing, and go-to-market topics like partnering, lead generation, and use of internal resources to support selling.
The above discussion illustrates the numerical challenge faced by salespeople in building and maintaining the necessary Funnel to achieve their assigned quota.  Many of you already likely had an empirical sense of this through the realities of years on territory.  Perhaps this discussion has brought more focus and the example model can provide a tool with which to plan for a Funnel size that will enable your success.
Are you knowledgeable about your Funnel metrics, or would you like to plug in your best estimate to see the impact on your “ideal” Funnel?  You can construct your own simple model, or if send me an email request I would be please to send this simple model to you.






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