Many elements of Sales Management seem obvious when you as a Sales leader manage your team. One of these is the concept of funnel versus pipeline. What’s the difference? Although it’s a subtle difference, it’s a fundamental principle of forecasting that is often taken for granted because to most managers it seems obvious. We focus on this with clients when we work on changing the model of sales performance for their teams. Some of the most obvious assumptions we make about managing sales are the ones we don’t get right.
Funnel versus Pipeline
In our view, a Funnel is the overall collection of sales opportunities as they progress through their respective sales cycles. It is what the Sales Manager looks at to determine their forecast. We tend to see the funnel as that V-shaped object that shows the stages in the sales cycle, generally “funneling down” the number of opportunities as deals fall out or are lost for various reasons. (See the diagram below as an example.)
The Pipeline is what a sales rep manages; that is, it’s their collection of specific sales opportunities that they are working on. Pipeline management focuses on the activities and work effort around the opportunities themselves as worked by the sales person. It is tactical and is driven by interactions reps are having with prospects and customers. It is less about forecasting and more about the day-to-day prioritization of work sales people manage when they do their job.
We make this distinction because we believe a key element of sales management is the ability to use concepts surrounding the Funnel to provide Sales Managers with the ability to accurately forecast how opportunities will move to closure. This is critical to ensure forecast accuracy – in fact, it’s one of the key reasons why we can create highly accurate forecasts with our clients. To illustrate the point, I’m going to walk you through how we create metrics for the Funnel so that you can see their impact of the on our ability to predict revenue.
Creating the Metrics
Funnel Metrics helps managers understand that from the very top of the sales funnel process (for example, where leads are generated by marketing campaigns and/or where sales people cold call), there is a certain number of opportunities reps must work with and move down the funnel so that the team ends up with the desired number of closed deals, resulting in your quota. When I consult with clients, I use a diagram like the one shown at the left.
One caveat before we start: as my old boss used to say, “it’s better to be grossly right than exactly wrong!” The point is that we can come up with many additional details (and we do with clients) to fill this out, but if you buy into the general notion of calculating metrics, you won’t get hung up on the possible exceptions. At least for now.
To determine your funnel metrics, first define the current or desired sales cycle stages you have in your sales process (six stages in the diagram). Then, take your total annual revenue number and divide it by the average revenue per deal to get the number of deals you need to win in a year.
Now put that number in the Close Box (in this case, 10). Work backwards from Close to figure out how many deals are needed at each stage, and how many are eliminated at each stage. For example, it takes 13 proposals to get to 10 wins, and 25 qualified deals to get 10 wins. You do this for each stage, finally getting to the Leads stage (or whatever stage is at the top of the Funnel). Each stage stands on its own.
You can calculate the Probability of winning a deal at each stage by dividing the number of deals at any stage into the number of Closed deals (e.g., 10 closes / 13 Proposals = 77% close rate. By doing this, you can also look at any rep’s pipeline and by knowing how many deals are in each stage, you have a clear mathematical way of predicting whether they have enough deals to make their number.
I am often asked how I come up with the number of deals at each stage, and in a future post, I will explain that further. However, I will say that while we use historical information to make this determination about half of the time, sometimes that data is not accurate when it comes to determining the right “flow” in the funnel. When that is the case, we end up building a mathematical model to start the process. Unfortunately, history is not a good indicator of future performance when you make many changes to the sales process and other aspects of selling moving forward. One thing we do assume is that each stage is objective – that means certain steps are taken, certain deliverables are provided and/or the sales rep has met with specific people that indicate the stage is complete. Based on an objective stage model, you can better predict how many deals are going to complete a given stage.
Now you have the means to see where each rep’s pipeline is compared to the Metrics. It’s based on objective experience, so no one can deny it (unless you are completely re-vamping your process, in which case you can create “ideal” Funnel Metrics to start). You can also compare individual rep’s pipelines against the Funnel Metrics see how they are stacking up. You can look at performance at each stage and determine how you need to coach each rep based on how their pipeline compares to the Funnel Metrics. Finally, you now know if there’s enough Leads to close the total deals needed to make quota. There is much more you can do with this as you might expect and I’m happy to share ideas with you if you are interested in learning more.
Why is this important? While the concept of the metrics in Funnel Metrics is not complex, many sales managers do not have a working knowledge of pipeline and funnel metrics practices. The value of these practices comes from knowing how to manage the process and the people in the first place. It is often assumed by management that you as a sales manager understand all these details; thus, the concern and often emotional reaction from management when you don’t! I can say from personal experience that I didn’t understand Funnel Metrics when I first became a sales manager.
As we pursue engagements with clients, my colleagues and I will work with them to drive greater insights into their sales effectiveness by encouraging them to invest in their sales process and practices, and by working with sales leaders to help them gain valuable insights into how they can improve sales team performance using these metrics. This leads to better results from Salesforce.com and real efficiencies in managing the pipeline with pipeline tools because the metrics are incorporated into CRM and can be used to enable an entire set of forecasting reports and analytics.