The Power Of The Sales Funnel

Sales. For some of you, the word conjures up dreaded images of sleazy mustachioed men in leisure suits knocking at your door with a case full of snake oil. Or maybe it brings to mind Willy Loman, the unstable, insecure, and self-deluded professional from Arthur Miller’s Death Of A Salesman. Or maybe your reaction is completely the opposite. Maybe the idea of overcoming rejection after rejection, to eventually reach your targets, actually excites you.

Sam Altman is the President of Y-Combinator, the original modern startup accelerator.

Hopefully the scenario is the latter as running a company is largely about sales. The exception being in the early days when you are doing customer validation. At this stage you are listening to people rather than selling them something. That feedback then leads into a better product which will engage them more. But this exception aside, almost all of your responsibilities as a founder will involve selling, some examples being:

  1. Selling your startup idea to a potential cofounder.
  2. Selling your idea or product to investors to raise funds.
  3. Selling your company to your first hires.
  4. Selling your product to your first users (once you have established product-market fit)
  5. Selling your product to other companies and corporates (if your product is in the B2B space).

As you can see, you will be spending a lot of time selling. So the question is, how can you get good at it. One answer to this is the use of the Sales Funnel.

What Is A Sales Funnel

Given all the reasons sales is important, you need to do it well. This is where the funnel comes in. A sales funnel is a powerful tool with a simple purpose: to track and analyse your activities so you can improve your techniques and increase revenue.
Let’s say your startup produces specialised software and your goal is to sell 10 subscriptions in 12 months to 10 individual companies with an average deal value being $10,000. In other words, you are looking to make $100,000 by the end of the year.
Now if life was easy, you would call up 10 companies, they would all say yes, and your job would be done. But life is not easy. In the real world, you will have to talk to many, many leads to get that 10. And throughout that process, you will get refused at different stages. Some will not respond to any calls or emails. These are dead in the water. Some will take 1 meeting, but then politely decline. Some will take 2 or many more meetings and then decline. Some will take a meeting and then ask a gazillion questions over email. And then decline. Some will sign your contract and then balk, reneging on the original agreement (rare, but possible). Finally some will trudge through all of this and finish by sending you a cheque or making a deposit in your account. That’s a win.
Understanding there are only a handful of possible outcomes allows you to divide the process into stages, as seen in the example below.
This example was produced by Pipedrive.

In the image you see 4 examples of stages that can occur before a deal gets closed:

  1. Qualified Deals. This is the start of the sales cycle. Nothing happened here except you discovered an appropriate person you could potentially sell to. The key word here is qualified. That means you did not try to sell dog food to a person who only owns cats.
  2. Meeting Held. You contacted the qualified lead, they agreed to the meeting and you had that meeting.
  3. Proposal Sent. After the meeting you sent them a proposal with details on what you will sell them and for how much.
  4. Terms Accepted. They agreed to the terms of the deal.
  5. Deal Won. They signed the deal and sent you the money.
Not all deals progress from one stage to the next. Therefore there are more deals at the top than there are at the bottom. It is from this shape that we get the term funnel to begin with.
You will notice that the chart indicates the conversion rate between each stage. 80% of all Qualified leads took a meeting, 50% of all Meetings Held lead to the prospect requesting a proposal, etc. Also indicated is the average value of the deal in each stage and the number of days spent in each stage. This information is immensely helpful, the reasons of which I will write about in a bit.
The above stages are only examples and can be different depending on the company. For example, some startups get great results just through a phone call and so would not include the stage Meeting Held. As long as the stages signal significant events in your cycle, you can use whichever milestones you like. The important thing is to have the milestones and to use them religiously.

The Power Of The Sales Funnel

Now that you understand how a sales funnel works, let’s look at the benefits. Used correctly, and on a daily basis, a healthy funnel will empower you to:

  1. Eliminate Blocks to Yes. By using stages you can see where failure happens most. For example, if most of your stages see an 80% conversion rate, but your Meeting Held to Proposal Sent conversion rate is at 30%, then something is going wrong during those meetings. Your challenge then would be to test strategies around that. For example, you could see if changing your pitch or your pitch materials increase requests for proposals. Or maybe you could ask your prospect at the end of a meeting what is holding them back. Questions like this may make you seem less than competent, but sometimes it is better to take off your sales hat to get valuable insights. It’s worth it to completely lose face on one or two deals if it means improving your effectiveness in your next meetings.
  2. Follow Up On Leads. Tracking your leads ensures none of them fall through the cracks. A pipeline (aka a funnel) could involve hundreds, if not thousands of deals. But even if yours consists of just a few dozen prospects, you’d be surprised at how quickly you can get caught up in your day to day hustle and forget ignore deals that seem unimportant, but could surprisingly lead to a win.
  3. Make Following Up More Effective. If you are implementing an effective funnel, that means you are taking thorough notes. These notes make following up more productive. For example, maybe your prospect said that they needed one more meeting with the VP of Marketing before they would look into requesting a proposal. Maybe they also said that they wanted to hear how you deal with a specific problem that wasn’t addressed in the first chat. If your follow up is a month after that first conversation, you may forget those details. Inversely, a funnel that is done correctly will make sure you action these points in a thorough way, leaving your client impressed.
  4. Predict Results. Once you have been through a few iterations of your sales cycle, the data you collect will help you predict future revenues. This may not seem important at the beginning because you are so focused on getting your first deal, but once you have been in business for a few months, you will be thankful you put in the effort. The ability to predict how much revenue you will have each month is critical on many levels, whether it be to communicate progress to investors, or to understand how many new hires you can afford.
  5. Collect Data For Investors. As mentioned, data is important for investors. An angel or VC does not care if you made $10,000 this month. They want to know the average of your earnings over the past 6 months minimum, if not longer. In addition to wanting to know your revenue, they want to know the underlying process bringing this money in. It helps them to understand how you are succeeding and that your methods are repeatable. That it’s not just luck.
  6. Track Team Performance. If you have a sales team, the funnel allows you to see who is doing what, where. It also allows you to build efficiencies by learning from the strengths and insight of each team member. Let’s say you’re examining the conversion rates from First Meeting to Sent Proposal. If the whole team is at 40%, but Sally is consistently hitting 90% every cycle, well then there is something to be learned from her and to be spread to the rest of the company.
  7. Go From Push To Pull. Struggling to hit your sales targets creates a vicious cycle. If your team seems desperate and is practically begging for deals to close, that desperate look will turn clients off. Also, customers want to know that they are buying something that everyone wants, something that is in demand. Having a healthy sales funnel means you are having as many quality conversations as possible which also means you are finding as many hot leads as possible. This turns the energy from push to pull. When you start out in sales, you are pushing your product on people. By pushing, I mean you are taking the initiative to contact people, to follow up, and to make things happen. Once you have shown that your product is great and that it is in demand, people will start contacting you. That’s pull. Needless to say this is the ideal scenario to be in. And the best way to do this, aside from having an amazing product, is to have a full and healthy sales top of the sales funnel.
  8. Manage And Reduce Your Stress. Being more in control of your sales process will reduce the unknowns that can lead to pessimism and doubt. If things are not going well, you will see clearly why and you can take action on that. If things are going well, you can make sure they stay that way. Either way, you derisk your sales process which in turn lowers your stress level.
The 8 points above clearly demonstrate the power of tracking your sales activities in an organized manner. But keep in mind that a sales funnel is not just useful for selling, but also for fundraising, getting accepted into an accelerator and for getting a job. The goals are different, but the approach is the same. Talk to a bunch of investors until you get a check. Talk to a bunch of companies until you get a job. By looking at this as a ‘numbers game’, you remove the emotional element and encourage cool-headed thinking, a recipe for success. Every. Single. Time.