The sales funnel is a powerful tool. Once you understand what the stages of the funnel are and how the sales math works, your funnel will become a critical tool to manage your sales team, as well as the corporate resources needed to support sales and delivery.
What is a Funnel?
A funnel often referred to as a pipeline, is the mechanism used to manage sales opportunities. The funnel is typically broken down into stages (ideally 5-7 stages) that include important information like the name of the prospect’s company, the product being sold, the value of the product, and the close date. In a perfect world, it would also include the next action and next action date.
We use a funnel because what we know is that what goes into the top of the funnel does not always come out the bottom, and the top of the funnel may require 10 opportunities for every closed deal. Thus, creating a funnel shape, rather than a pipe shape. It doesn’t matter what you call it, as long as you understand the concept.
Why Do You Need a Funnel?
When used properly, the funnel is a powerful tool for salespeople, managers and company leadership. The funnel should allow you to forecast revenue at least as far into the future as your sales cycle allows. It provides information that leaders can coach around, and helps salespeople manage and prioritize opportunities.
The Stages of the Funnel
The standard funnel stages are:
All of the activities that happen in a sale happen in one of these stages. If your sales process is particularly long or complex, you may want another stage or two, but the more complicated the funnel, the harder it will be to use effectively.
Sometimes to help people understand better, I refer to the stages as prospecting, qualifying, cultivating and closing. I do that because I want everyone to understand that they are in the process of prospecting or qualifying a client. The only stages not in progress are won and lost, thus, they are in past-tense.
Funnel Stages Defined
Prospect: Your team is reaching out to people who have not indicated an interest. They are people from companies you believe will be interested. In this stage, your team is using tools like email, social media, content, networking, even advertising to build awareness and hopefully stimulate interest.
Qualify: The prospect has indicated some interest, but you still need to determine if there is a budget, a fit, and a timeline. During this stage, your team might exchange emails, get on the phone or do a video meeting. They will be asking questions and giving some preliminary information to develop the interest and qualify the lead.
Cultivate: During this stage, your team is meeting with all buyers involved in the sale. They are confirming the fit and building interest. It is also when they will identify potential objections and work to move the sale forward. During this stage, your team should be gathering the information needed to create a proposal. This kind of work requires face-to-face-face or video meetings.
Close: During this stage, the sales rep is focused on finalizing the details and getting a commitment from the buyer(s). Ideally, that would be a contract or agreement. Sometimes using an online signature tool can speed things up.
Won: This should be the simplest stage, but it may be the one where there is the most confusion. Different companies define “won” differently. In some companies, a signed contract signifies a closed deal. In other companies, it might require an executed check. Whatever the case, at this point the lead moves from sales to delivery. Sales should remain in contact, looking for future business and seeking out referrals.
The Sales Math
A typical expectation is that for every 10 things that go in the top of the funnel, only 1 will actually close. A 10:1 ratio. During the prospecting process, your team will discover that some companies don’t have a need. While qualifying your team will discover that some opportunities are not a good fit. While cultivating, it will be discovered that you aren’t going to be able to overcome all of the obstacles in every opportunity. That is normal and allows the team to keep focusing on the opportunities that are the best fit, the most profitable and the most likely to close. For each of those stages, an appropriate ratio will begin to come clear. It might look like this:
- Prospect to Qualify = 10:5
- Qualify to Verify = 5:2
- Verify to Close is 2:1
- Close to Won = 1:1
Find out what your ratios are and manage accordingly.
Using the Funnel to Predict
Once everyone on the team is using the funnel the same way, you will begin to see patterns. Those patterns will define the needed ratios to achieve sales goals. The patterns you will see are:
- Length of your sales cycle
- What factors influence velocity
- At what rate things fall out of the funnel
By consistently using the funnel, it will become clear what percent of leads fall out of the funnel at each stage. What percentage close once they get into verify and close, and how long the sales cycle is.
- Some companies make the mistake of using the past tense – Qualified for instance, which is confusing. If an opportunity is qualified, that means you are done qualifying and are ready to move it to the next stage where you will be cultivating or verifying the opportunity in preparation to move it to close.
- It is not necessary to make each activity its own stage. We often see a stage called “Submit Proposal”. That is not a stage, it is an activity that happens during one of the stages. It is not necessary to have the activities on the funnel, only for the sales reps to understand the sales process well enough to know which activities happen in each stage. We call that mapping the sales process.
- Confusing stage with status. Sometimes we want to track if a deal is active or stalled. Neither of those represents a stage. They are a status within a stage. The opportunity might be in cultivate and stalled. That can be indicated in the spreadsheet or CRM as a status, but not as a stage.
- Confusing competitive position with status. “Preferred Vendor” is not a stage. In qualify, cultivate and close you might want to know your position versus the competitions. In the CRM you could have a place to show that. It might be, no competition, competitive, vendor of choice, or losing to a competitor. Vendor of choice, however, is not a stage. Making it one creates confusion. It is how you are positioned within the stage and should be used accordingly.
If your team is carefully trained to properly maintain their funnels, you will be accurately forecasting and adjusting activities and priorities to make sure that you will hit your goals. If not, watch my webinar with my good friends over at Nimble to discover How to Use Your Sales Funnel to Grow Your Business Faster!