Lesson 2: Mechanics of the Sales Funnel

To work through the sales funnel and onto the next stage, certain barriers need to be removed. When you remove a barrier, the sales opportunity (that is, your potential customer) moves to the next stage. Barriers to sales could include anything from uncertainty around the product’s fit, purpose and value to a lack of budget or hitches in the customer buying process.

No one-size-fits-all approach exists for sales processes, but over time, you’ll gain experience. As you get to know your customers and the environment in which you operate, you can craft your own sales funnel that is specific to your business. For now, the above sales funnel is a good base to start from.

To manage the sales funnel process, a business needs to set up some key sales metrics.

Sales Metrics

Metrics are a collection of individual and organisational performance indicators and ratios. Put more simply, they are the concrete, measurable things you look at to determine whether you’re succeeding or not.

Sales metrics are used to understand the effectiveness of the marketing and sales activities of a business as well as the efficiency of the sales process. They also provide insight into where the business sits in the competitive landscape, which activities yield the best results, and which activities should be altered or removed.

For early-stage startups, we recommend that you monitor the key sales metrics below. These will help you to calculate realistic sales projections as part of your ongoing business planning process.

Average size of sale

This metric will help you to make sales forecasts and identify factors that contribute to increases in deal size. To calculate it, you need to determine the average Rand amount (or the currency of your choice) brought in by each sales contract. You can refine it by eliminating very low or very high values that might skew the average. If you’re involved in a business that includes services and products, split the revenue into two streams.

Sales Cycle Time

Sales Cycle Time evaluates how long (the number of days) a sales opportunity sits in your sales funnel. The sales cycle time can be measured either as an average or as an interval (maximum/minimum process length). Working out your sales cycle time allows you to identify areas where you can shorten specific points, focus your efforts on opportunities that are more likely to close, and discard those where no buy-in exists.

Conversion rate

This metric helps you understand the quality of your qualification and sales process as well as how quickly you can convert qualified leads into closed sales.

You can achieve this by determining the ratio of closed deals compared to the number of opportunities at the different stages in your sales funnel. For example, you might notice that it takes 30 leads to generate one sale, 15 prospects per sale, or seven qualified prospects per sale.

Churn Rate

The churn rate looks at just how sticky your customer base is. This metric should indicate how well you, as a business, hold on to customers. The absolute value and the trend over time are both important for churn. Keep a look out for sudden spikes or plateaus at a high level when reviewing your churn rate and try to figure out why this is happening.  

Customer Lifetime Value

How much each deals closes for is important, but so is how much those customers will bring to the business over time. Customer lifetime value measures the net value of a business’ average customer over the estimated life of their relationship with a company.

Closing Rate

This metric calculates the number of proposals per sale. It’s similar to the conversion ratio but places specific focus on the final stage of the funnel – the closed deal! If you and your team are working hard and placing adequate time and resources into the sales process, this ratio should be high. A low or fluctuating closing rate could be an indication of:

• Lack of competitiveness in the market
• A poorly crafted customer value proposition
• Mismatched market relevance
• A need for additional staff training

Because this final stage takes such a huge amount of time and energy to reach, the ratio should be around 1 in 3 (one deal expected from every three proposals) or better.

Revenue Run Rate

At some point, you’ll want to start seriously looking at scaling your business. Measuring how this might occur is important. Your revenue run rate measures how sales develop over time and allows you to analyse how likely you are to achieve specific sales forecasts, identify patterns, capture trends and explore potential problems with your pricing strategy. All of these are required for you to start developing a growth strategy.

When working on your sales process and the development of your sales metrics, consider the following aspects of the sales funnel:

• How has the pipeline value changed in the last week, month, quarter or year?
• Are conversion ratios stable over time?
• Do the ratios you capture provide enough explanation of any variability in your revenue?
• How can you improve the quality and amount of sales data you capture?
• Is anything happening in the external environment that might alter key ratios?
• Do certain factors increase the predictability of a deal closing?
• Do you have sales traction within a particular industry or market segment?

Planning and purpose are key to developing your startup’s sales metrics. Too often, a startup business will dedicate all their energy to chasing funding or finding the right talent to join the team, and simply not enough time developing metrics to measure success. View your sales metrics as your map to success.