Sales forecasting is one of the most difficult tasks to accomplish in a business, especially when entering a new market. The concept of using a “sales funnel” in the forecasting process helps reduce errors and greatly improves ongoing control and monitoring of the sales process.
Typically sales managers generate sales forecasts in terms of number of sales per month or per quarter. That forecast is then used by the financial and operations side of the business to generate revenue, margins, and production forecasts. While the sales forecast generates the financial information that the rest of the management team needs to do their job, the sales manager often underestimates the amount of effort and length of time it takes to generate those sales, leading to missed forecasts.
Understanding the Sales Funnel
The idea of a sales funnel is just how it sounds: wide at the top and narrow at the bottom. In a normal sales cycle, many of the unqualified prospects that go into the top of the sales funnel drop away during various stages of the sales process. The more complicated and longer the sales cycle, the more levels there will be. A typical sales funnel has the following levels:
- Unqualified prospects
- Initial communication and qualification
- First discussion
- Development of solution
- Presentation of solution
- Customer evaluation
- Verbal commitment
- Purchase order
Sales, like any business process, requires planning. Just as a funnel narrows from the top to the bottom, so does the sales funnel. A rule of thumb says there is a 100-to-1 ratio between unqualified prospects entering the funnel and one purchase order exiting the funnel. The higher the quality of prospects going into the top of the funnel, the lower, and thus better, this ratio can be.
Succeeding with the Sales Funnel Approach
To continuously generate sales, it is critical to keep each level full and feeding to the next level. Understanding the sales funnel and sales process can help improve forecasting in the long term as well as give warning in advance that something is not going well. The following are three major uses of the sales funnel:
- Shortening of sales cycle times: By breaking down the sales process into steps, you can determine how long it takes to move each potential customer through each step of the process. This gives you a better handle on the sales cycle for your product. Looking at each level of the funnel and assigning span times will improve understanding of lead times and give a clearer idea of where to apply more resources to shorten the sales cycle.
- Early warning of sales problems: If the sales manager monitors the numbers of prospects at each level of the sales funnel, you’ll have advance warning when sales are not performing to forecast, and early action can be taken or resources reallocated.
- Improved sales resource forecasting: By examining the amount of company resources necessary to move prospects through each level of the sales funnel, the manager can determine the necessary personnel or marketing needed to produce the expected results.
The parameters of each of step (drop-off rate and time span) can be estimated and then refined as more is learned about the market.
Sales forecasting is a numbers game. It takes a large number of leads to generate one customer. Using a sales funnel concept allows management to better understand the sales process and then improve forecasting accuracy and resource utilization.
John C. Shovic is a partner in Coeur d’Alene, Idaho–based MiloCreek Consulting.