Understanding The Sales Funnel

B2B Sales pipelines are more telling than most people realize. In this post, I’ll outline how to think about sales funnels, and the implications of the sales funnel on the rest of the business.

What are the stages of the sales cycle?

There are five stages that prospects go through during the sales cycle. These stages will be referenced a few times in this post.

What should a sales pipeline look like?

There are, broadly speaking, three shapes a sales funnel can take (on a # of customers basis; you can see some odd shapes if you track projected deal size throughout the lifecycle of a deal): Conservative, moderate, and aggressive.

Why these names? What makes one of these graphs more conservative than the others?

Let’s look at the same graphs, but from the perspective of a single deal that’s halfway through the sales cycle. To analyze the “sales funnel” for a single deal, let’s examine the ratio of the size of top of the funnel to the size of the bottom of the funnel. The smaller the ratio — or in other words, the “tighter” the graph — the more likely that deal is to close.

It’s obvious which of these models is most predictive for a deal that’s halfway through the sales cycle. The conservative model of course! Companies that have a sales funnel that looks more like the aggressive model really don’t know what the probability of closure is for a given deal because it’s not clear how fast the graph will turn in towards the end of the sales cycle.

What can a sales organization do to optimize towards a conservative sales funnel?

Qualify, qualify, qualify!!! It’s pretty difficult to over-qualify deals in the early days. SDRs don’t necessarily need to do all of the qualifying. The larger the ACV, the more information will be needed to really understand if a customer is a right fit for your solution. While a deal is still in Recognition, AEs and/or SDRs should be qualifying as much as possible.

As one point of reference, during my tenure at Pristine, our close rate on a # of customers basis from Determination to close was 93%. On a $ basis, the close rate from Determination to close was actually over 100% as we had under forecasted almost every deal in the earlier stages of the sales cycle. To be fair, we didn’t have any direct competition. We competed against the status quo, so bake-offs and price-based competition weren’t major factors that impacted the sales funnel conversion rate towards the end of the sales cycle. Obviously, competition will dramatically reduce conversation ratios at the end of the funnel.

The larger the ACV, the more conservative the sales funnel needs to be. This makes sense so that the company can accurately forecast and achieve its quarterly revenue targets, but also because the amount of work required on a deal increases exponentially as a deal progresses through the sales cycle. As a general rule, each stage of the sales cycle takes 10x more work than the prior stage, except Acceptance. It’s imperative to qualify as much as possible as early as possible to maximize the efficiency of the sales organization.

Why is it important to optimize towards a conservative sales funnel early?

Developing a sales process that results in a conservative sales funnel requires tremendous discipline and is a strong indicator of general operational excellence. A startup with a conservative funnel knows how to identify, qualify, and close customers in a systematic way.

There are also logistical reasons to optimize towards this early. Changing the shape of this funnel gets harder as sales organizations grow. Processes become more rigid; coordination, training, and re-training become more challenging; egos grow, etc. For example:

In a 100-person sales organization, it’s going to be much more difficult to change the shape of the curve than in a 10-person sales organization. In a 100-person sales organization, making changes at one step of the funnel will require upstream and downstream changes in the rest of the sales organization. A lot of people will need to be retrained, comp plans restructured, team shuffled, etc. In a 10-person sales organization, the CEO and VP Sales can gather the entire sales organization in one room, walk the whole team through the gap in the sales funnel, how it’s going to be addressed, and discuss the implications for each individual over the course of a few hours.

Lastly, a conservative sales funnel makes a startup a generally healthier and predictable business. In almost all cases, CAC increases as a startup scales. Why? Because as startups pursue growth, they inevitably adopt less efficient customer acquisition channels than those used in the earliest days. Moreover, as a startup grows, competition inevitably does as well, which will drive down close-rates at the end of the funnel, dramatically driving up overall CAC. In some cases, once a brand is established, CAC can decrease as the brand itself draws in the customers, but it should be assumed that CAC will never decrease until there’s material evidence to the contrary.

If you assume that CAC will always increase or perhaps eventually flatten out, the importance of optimizing towards a conservative model becomes even more important. The more variable the cost per lead at the top of the funnel, the more variable the CAC will be at the bottom. This variability will increase the more aggressive the sales funnel is. To maintain a healthy LTV / CAC ratio, it’s imperative to arch the sales funnel inwards towards a conservative model early in a startup’s lifecycle.

Note: I’m a huge fan of Insight Squared for sales funnel reporting and analytics. It makes visualizing and understanding a company’s sales cycle simple. I’m sure there are other tools that are just as good, but my experiences with Insight Squared have been superb.