Shape and Velocity of the Sales Funnel

This article was written by Stu Schmidt in 2003. These were the heady days of Salesforce.com expanding beyond a single floor at One Market; of Upshot being acquired by Siebel; of the emergence of the science of sales process.

 

The Art of Measuring Sales

by Stu Schmidt

Quotas have gone up again this year. Resources have been cut yet again – the company needs us to do more with less. The competition is fierce, and our buyers are only spending on solutions they must have now. The plans for equipping the sales force have been made and implementation of training, the compensation plan, and methodology are all underway. We’ve committed the time, money and resources to improving our sales productivity, but how do we know that the plans we’ve implemented are creating the result we want? If we wait until the results are in, it will be too late. Even when we do see the results, how will we know if the result related to what we did, or to some other external factor?

In sales, this scenario is all too common. When we make investments in programs that should impact sales productivity and effectiveness, we often do it based on gut feel and experience, hoping that at the end of the day, we’ve done the right thing. We don’t have visibility to the effect our efforts are having until the end of the game. Unlike almost every other function in the enterprise, sales does not have a closed-loop management system that allows us to measure, manage and optimize our sales process – while it’s happening.

This is the first in a series of articles dedicated to helping you create an effective way to measure, manage, and optimize your sales process. My goal is to help you increase your visibility to the actions you can take to immediately impact performance and dramatically improve your forward visibility.

As a sales manager you know the importance of measuring the performance of your sales force. The questions are; what are you measuring? Are you measuring the right things? Are you measuring them at the right frequency? Or is all this measurements stuff just a colossal waste of time?

What, more measurements?

On the surface it feels like that the last thing we need are more measurements. We’re already either measuring, or being measured, on a myriad of data points. It seems that every time the CEO or CFO walks into our office, we end up with more things we have to measure. Do any of these sound familiar?

  • Results against quota
  • Discount percentages
  • Average selling price
  • Cost of sales
  • Booking to revenue conversion ratio
  • Booking linearity
  • Predictability
  • Forecast accuracy
  • Gross margin
  • Conversion rates by forecast category
  • Expenses
  • Accounts receivable

In addition, we need to produce all these by territory, by product family, and by revenue type. In fact, we could (and I’m sure you know some sales managers who have) make a career out of crunching the numbers. Where are we going to get the time to actually do something that will impact the numbers, not just report them? After all, that’s really what it’s all about, isn’t it… positively impacting the numbers?

Why, after spending so much time measuring, is it not obvious what action we can take to impact the numbers? Have the measurements told us anything that we didn’t already know? Have the measurements offered some insight or visibility to why the results are what they are?

Here’s a sobering thought – might we be measuring the wrong things? All of the measurements listed above share one common characteristic. Go back and take another look at the list and see if you can pick it out. No, it’s not that they were all invented by sadistic accounting trolls. They all measure something about the sale after the sale has already taken place.

Imagine for a second that you’re the VP of manufacturing, not sales. You get a call from Bob in QA at the end of the line, saying that there’s something really wrong with the finish on the hoojedees. Rushing down to the floor, you discover that the paint is streaked and uneven: clearly, not a quality job. The problem obviously is something to do with the paint. You order the line shut down, the paint system purged, cleaned, and refilled with new paint. You hang around as the line starts up. To your horror and dismay, the paint on the hoojedees is still streaked and uneven. Now the challenge is not only finding what is causing the problem, but explaining the major cost and waste to the CEO.

By the way, so as not to leave you hanging, the problem wasn’t the paint at all, it was a contaminant in an earlier stage of your manufacturing line. The reason you didn’t know this was that you were only checking the results of the process. You didn’t understand what was happening during the process.

Transferring this analogy over to our world of sales, we see some disturbing similarities. All, or at least the majority, of our measurements are trailing indicators – they measure an aspect of the sales process after the fact. In addition, we often don’t know what is really happening inside the sales process – what are the major activities that should take place at every stage of the process, and how do we know that each one was completed successfully?

Measuring only result-based indicators, and not knowing what is really happening inside the sales process will generate the same outcome for us as for our poor manufacturing VP: continued flat results with no idea of how to change them.

What should we be measuring?

We know that we still need to track results, but now we also know that simply tracking results will not give us the insight to the action we need to take. So, what should we be measuring?

The answer is to get inside the sales process, and measure some key indicators prior to the completion of the sale. In order to get inside the sales process, we need to know what the sales process is. This is the starting point and the foundation for any approach that hopes to measure, manage, and optimize sales. Defining your sales process is beyond the scope of this article, but at a minimum you need to:

  1. Know the major steps involved in the sales cycle, from prospecting through to acquiring and maintaining a satisfied customer
  2. Establish a common language and culture around the process so that everyone has the same understanding of what we mean when we say “we’re in the proposal step”
  3. Define the activities that need to typically occur at each step to effectively progress the opportunity to the next step
  4. Implement a Sales Force Automation or CRM system that will allow you to track opportunities by step in the sales process

Funnel

Your sales process is unique to you – your market, your strategy, your customers, and your unique environment. However, every sales process has some key steps that are always present in one form or another. For illustration purposes throughout this article, let’s imagine we have the following sales process:

  1. Lead generation
  2. Initial qualification and research
  3. First contact and additional qualification
  4. Detailed discovery
  5. Solution definition
  6. Proposal
  7. Negotiate and close

Assuming the process is in place, we can now start to truly measure it. In a hope to avoid the religious wars about the difference between the funnel and the pipeline, and “above the funnel” opportunities, let’s just call the whole thing the “funnel.” It includes every opportunity from initial lead generation through to close.

The most common measurement that organizations start with is “how much do I have in each step of the funnel?” This initial process measurement is one small step for a sales manager but one giant leap for the organization. It is far more powerful than the simplistic “pipeline multiple” that is in common use. For example, in some industries, a pipeline multiple of 4X is considered good. In other words, if my quota is $1M for the quarter, I know I need $4M in my funnel. The shortcoming of this old approach is obvious – what happens if the $4M in the funnel is all at step 3 or earlier? Good luck making the quarter! Prepare 3 envelopes.

The second most common measurement is sales cycle length. It’s critically important to know that it’s taking you eight months on average to move an opportunity from raw lead to closed deal.

Combining the two measurements we begin to get a glimpse of the true art of measuring sales.

However, we are still missing one key element – the most important element in sales – movement. It’s one thing to know what is in your funnel at a particular step; it’s far more powerful to know what’s moving through your sales funnel. If a sales opportunity is stagnant, if it’s hung up at step 3 of the process, it is contributing to your step 3 numbers, but will it ever contribute to your results?

Consider football (apologies to our Raider fan readers). It’s good to know that we have the ball on the opponent’s 20-yard line. It’s far better to know that we got there through a series of systematic plays and first downs – that our execution has moved the ball. Conversely, if it’s 4th and 18, we may want to try something a little different next time we’re on the 2-yard line.

Just like football, let’s call this movement of sales opportunities from one step to another, conversions.

Shape and Velocity

Like all breakthroughs, what I propose is elegantly simple in concept. The true art of measuring sales process emerges when we measure all these aspects of the sales cycle by step for each and every opportunity. We call this the shape and velocity of the sales cycle. Understanding this shape and velocity is the key to successful sales management. It unlocks the gates to forward visibility and proactive activity management.

You are probably thinking by now, “Why bother with all this detail? This seems like a lot of extra effort.” Let me deal with each of these objections separately.

Let’s say you already buy the fact that you have to measure conversion ratios and sales cycle length at the macro level. You say, “Hey, Stu, I already know my sales cycle is eight months long and it takes me 100 leads to close one order. Why should I worry about this shape and velocity stuff?” Take a look at the following two sales funnels

V-funnel-good V-funnel-bad

In both cases we have an 8-month sales cycle and a lead to close conversion ratio of 100-to-1. Which one would you rather have?

The sales funnel on the left is characterized by quick and effective qualification and focus on the deals that are most likely to close. The funnel on the right represents unqualified leads being dragged through expensive steps of the process in the hope we can “turn them around.” The sales cycle on the right is costing your organization about 4 times as much as the one on the left. I would also contend that the one on the right is actually going to result in a capacity issue. Your sales force will actually only be able to handle 25 leads, not 100 in a given time period.

“OK, fine, I buy the shape thing, but what about velocity by step? Surely that’s overkill.”

Let’s go back to our initial example of measuring the funnel size by step. Because we’ve been measuring conversions, we’ve determined that it is going take $4M of step 4 funnel to make our number. However, what happens if step 4 is taking twice as long to complete as we expect it should? We now need $8M in step 4 deals to have a hope of making the number! You get the idea.

What’s it going to take?

I know, I haven’t dealt with the “extra effort” question yet. “How am I going to get my sales force to enter all the data I’m going to need to measure this way when I can’t get them to the SFA system properly today?” Glad you asked.

The real elegance of all this is that you actually need less data than you’re probably asking your sales force to enter today. Many organizations that I’ve worked with have SFA and CRM implementations that require the sales rep to enter over 50 fields for every opportunity… and keep them all up to date. It’s no wonder you get questions like “do you want me to sell, or just fill in forms?” Demanding an unreasonable amount of information from sales reps, especially when they can see no action being taken as a result, is one of the primary reasons for lack of use of these systems. By focusing on capturing only information that can lead to a decision or action, we can dramatically reduce the amount of administrative time required by the field, and increase compliance to the requested use of the system.

In order to measure shape and velocity of the sales funnel we only require:

  1. A sales process, as briefly described earlier.

  2. Some initial standards or metrics for our expected cycle times and conversion ratios. (These can be changed in the future as we “close the loop” in the management system. We just need a starting target to measure against.)

  3. An SFA or CRM system that will allow us to capture only six (that’s right – six) fields of data: (As your organization matures, you can add more granularity by adding more fields to your shape and velocity measurement. By adding lead source, you can track the effectiveness of lead campaigns over time. By adding product type, you can predict your sales by product, or detect trends for certain products in certain territories. And so on…)

    1. Sales professional’s name (should be automatic with any system)

    2. Customer name

    3. Opportunity name

    4. Expected close date

    5. Total value

    6. Current sales process step

  1. An analytic system, like eSP, that will provide you with simple, on-demand access to the shape and velocity indicators. The key is the ability to measure time. Without time, all we know is that we’re on the 20-yard line. When we add the element of time with an analytic system, we can see movement (the key to success) and gain visibility to trends that point to required action.

So what?

Just like any other measurement, the only reason we do it at all is so that we take some action as a result of the information. Measuring the shape and velocity of the sales funnel will allow us to take some very specific actions that will result in improved sales performance. Understanding the shape and velocity of the sales cycle will give us unprecedented forward visibility. Managing the shape and velocity of the sales funnel will allow us to optimize the entire sales process for continuous improvement in sales results.

In the next newsletter, we’ll take a look at some of the practical management situations, and resulting actions that could be taken, related to measuring the shape and velocity of the sales funnel.

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