Understanding the financials of your sales funnel prevents one of the most costly mistakes a sales program can make. Many companies make the mistake of scaling before they fully understand their sales funnel, which can lead to pricey and inefficient hires as companies staff labor to operate a sales machine that does not work. In this blog, we’ll discuss how you should go about understanding your sales funnel and the financial requirements of your sales program before you start selling and scaling.
The Three Stages Of Scaling Sales
The process of scaling an organization’s sales program requires three steps. The first step is proving the existence of a product-market fit. People often make the mistake of assuming there’s a need for their product or service without actually having evidence to back it up. Research studies and focus groups will only do so much. You need to test the demand for your product or service by hitting the streets and trying to generate that demand through a variety of channels.
The next step is to get a strong understanding of your sales unit economics and critical metrics. We’ll dive more into this in a moment, but having a target acquisition cost, which is then broken out into target cost metrics throughout the rest of your sales funnel, are critical KPIs that should be tracked at every stage in your organization’s growth.
This step is often skipped entirely, as firms think they can figure out their sales unit economics as they actually scale their team (the third and final step). This is attempting to build a plane while you’re flying it. Becoming an aerospace engineer and a skilled pilot take decades to master, and they are entirely different pursuits that certainly can’t be done simultaneously. Understanding your sales financials is all about understanding how much production you need to get out of each unit of time/expense, and what your current funnel looks like. Dollars/Hours in, closed revenue out. You should not be scaling your sales program without having an iron-clad grasp on your product-market fit and your sales unit economics or you risk scaling an unsolved problem.
Understand Your CAC
Put simply, your target CAC, or "customer acquisition cost" is how much you can afford to spend to bring in a new customer. This number should be the overarching goal of your sales program, and should be the center around which your entire sales program revolves. Your CAC is often represented as a ratio or percent of your annual contract value or customer lifetime value.
It is foolish to try to sell without an understanding of what costs you can incur to sell profitably. Think about it. If you just start selling your product and it costs you $4000 to bring in a new customer, you might be happy with that on the surface. However, if a deeper dive into the numbers suggests that you can only spend $2000 to acquire a customer to actually make a profit, your sales program is grossly underperforming and scaling it will only increase the pain. You must understand your CAC before you start selling so you understand what overarching target your program needs to meet to be successful.
Into The Funnel
Once you understand your CAC, you need to make some assumptions about how your leads will perform in your funnel. It’s not good enough to wait until deals are closed before you start planning changes to your sales and marketing directions. You can reverse engineer your CAC all the way into your necessary cost-per-lead for a successful sales program by projecting what percentage of leads make it through each stage of the funnel.
It’s important to note that the term "lead" can be ambiguous. At FullFunnel, we define discovery calls booked with your intended prospects as "Sales Accepted Leads" and hold those as the currency of a demand generation program. Your conversion assumptions will change depending on your target audience/industry/product, but you should at least start off with assumed conversion rates between SAL and SQL, SQL to Opp, and Opp to Closed Won, which can change and update as you collect hard data.
Once you have a grasp on your target cost per meeting, you can work through which different sales and marketing channels could be financially productive drivers of demand. Some channels will be realistic, and others will not. For example, if the keywords relevant to your product or service have an extraordinarily high cost-per-click, there’s a strong chance you won’t be able to hit your CAC goal in Google Ads. By expanding your funnel projections to individual channels, you can understand what channels do and do not make sense for your business.
Divide Demand Generation And Pipeline Management
It can be very helpful to divide your sales and marketing programs into two stages: demand generation and pipeline management. Demand generation refers to any and all of the activity that goes into booking initial meetings with your ideal customer profile. Your BDRs are working on demand generation, as are your digital marketers and content marketers. Once a meeting is generated, a hand-off typically occurs between your demand generators and your pipeline managers. Pipeline management is the process of taking those meetings and turning them into closed-won deals. This process can include everything from discovery calls to product demos to trials to price negotiations and contracting. There is an opportunity for failure at every point in your sales and marketing program, and thinking of demand and pipeline as two distinct phases of your sales process can help you identify the problem area faster. By understanding the mechanics and financial metrics of your sales program with small-scale demand generation and pipeline management, you can be confident that scaling the same system will produce the results you want.
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We understand that building a successful sales funnel, let alone a successful sales program, is incredibly challenging. FullFunnel has the expertise to help. We’ve worked with hundreds of firms across dozens of industries to create effective sales and marketing programs. Request a consultation today to learn more.
