Copyright 2014 by the Acton School of Business. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means without the written permission of Acton School of Business. This curriculum is used in its entirety at the Acton School of Business, based in Austin, Texas, an intense one year program taught exclusively by successful entrepreneurs. To learn more, visit www.actonmba.org. 10/2014

Building Your Sales Funnel “From Right to Left”

By Jeff Sandefer Introduction What is the most valuable asset in your firm? A factory? A patent? For many companies, and especially those with long sales cycles and expensive products and services, the answer might be your sales funnel: the systematic series of steps to attract, educate, qualify, close, and provide after-sales service to your customers. Sales funnels are difficult to build, almost impossible to copy, and extremely profitable when running smoothly. An effective and efficient sales funnel starts with a large population of potential customers and poses a series of questions and challenges so that mildly or disinterested prospects “self-select” out of the process, while you shape and manage the expectations of your best prospects, so that you can “close” them. Unfortunately, as companies grow larger and more bureaucratic, attention often shifts away from the “down and dirty” work of sales to the more esoteric (and harder to measure) pursuit of marketing. Marketing often becomes an incremental effort, reaching out to smaller and smaller segments of less and less interested customers, until the marketing effort collapses under its own weight, if it isn’t first swept away by changes in customer tastes, technological advances, or more attractive substitutes offered by the competition. Even for those hardy souls who do the difficult work of running a sales funnel and maximizing its effectiveness, actually constructing one from scratch will seem daunting. That’s because building a sales funnel from scratch is an iterative process, one that begins with your first sale and evolves depending on your ability to standardize steps and delegate sales tasks in the funnel, one at a time, in order to increase capacity, effectiveness, and efficiency. The purpose of this note is to introduce you to sales funnels, explain their importance, and provide a primer for building a sales funnel—through trial-and-error experimentation—from scratch.

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What Is a Sales Funnel? A sales funnel is the step-by-step process you use to attract, educate, qualify, close, and provide after-the-sale service for your customers. It’s also your system for measuring the cost and efficiency of each step and the overall average cost per sale. It’s equivalent in operations would be a process flowchart and cost-accounting system used to track the steps and measure the cost of making a good or delivering a service. In a well-run company, the production process delivers the product or service at exactly the same time a sales funnel delivers a willing buyer. The end result is a profitable sale and a satisfied customer. While there are generic steps in every sales funnel (Figure 1), each individual business will have a different sales funnel to serve its customers with different techniques, a different emphasis on different tasks and, at times, in a different order.

FIGURE 1. GENERIC STEPS IN A SALES FUNNEL

As the term would imply, you “pour” a large number of prospects or leads (potential customers) into the first part of the funnel and then, by asking questions and requesting responses, begin to separate the customers who need your product and are willing to pay for it from everyone else. The best sales funnels sort out uninterested customers quickly, so that you can focus your time and attention on those who have a more intense need for your product and are likely to pay a high price for it. Why Mid-Level Managers and Academics Prefer Marketing over Sales Designing and running a sales funnel are two of the most important tasks for any business and the critical tasks in a business with a complex or long sales cycle. Yet most undergraduate business and MBA programs stress marketing over sales. In fact, while it is possible to find a “sales management” course in some schools, “sales” is rarely taught, and tutorials and training on sales funnels are relatively difficult to find, especially in academia. This is because sales is often seen as a “dirty” occupation and bring to mind salesmen like Arthur Miller’s Willy Loman. It’s also because the closest that most tenured professors get to the real

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practice of “sales” is as a customer in a retail store.1 And it might even be because in many large corporations, for whom many MBA programs furnish mid-level managers, the sales funnel was established long ago by the founding entrepreneur and is taken for granted, if it is even considered at all. Most mid-level managers are much more comfortable with marketing, a white-collar job that allows staff to stay safely above the difficult, messy fray of the salesroom floor. After all, planning an ad campaign, where you are the pampered customer, is much more enjoyable than working with demanding customers, an activity that threatens to crush even the strongest ego. How Should Marketing, Sales, and Operations Work Together? If you were a CEO designing an organizational chart, would you have Sales reporting to Marketing or Marketing reporting to Sales? And how would you have the two interact with Operations to make sure the sales processes, production processes, and inventories were properly balanced? Most organizations have sales and marketing managers reporting up through a Vice President of Sales and Marketing (Figure 2), who often comes from the marketing side of things. This isolates Sales from Operations and exacerbates the natural conflicts between the two groups.2

FIGURE 2. TYPICAL ORGANIZATIONAL CHART

This view of the organization is reinforced in larger companies by financial accounting systems that collect expenses and set budgets based on functions—such as Cost of Goods Sold (COGS) for collecting manufacturing expenses, or Sales, General, and Administrative costs (SG&A) for collecting sales-related expenses. A different way to think about the relationship between Sales, Marketing, and Operations departments is as a process map that shows how the right customers are moved closer to a 1 Warren Bennis, “How Business Schools Lost Their Way”, Harvard Business Review, May 2005. 2 The “right-brained” salesmen would like to sell highly customized products at a very low price—they want to make the sale! The “left-brained” operations types want to produce standardized products and to sell them for as high a price as possible—to maximize production efficiency.

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purchase (the sales funnel) at the same time that a finished product is moved closer to being delivered and sold (the “making and delivering” process) (Figure 3).

FIGURE 3. AN ALTERNATIVE VIEW: SALES AND OPERATIONS COMING TOGETHER

Mapping and tracking expenses in this manner is more challenging, but it allows you to look for bottlenecks that can be removed and activities that can be improved to dramatically increase the profitability of your company.3 More importantly, deciding not to look at your business in this way might trap you in unexamined, unconscious, or ossified processes, where you chase increasingly small customer niches—each with fewer interested customers—while missing larger changes in customer tastes, technological breakthroughs, or competitor offerings that could doom your company. The Corporate vs. the Entrepreneurial Approach to Sales Funnels There are consultants who will help you map or tweak your sales funnel and reorient and retrain your sales force, and the best of these are worth their weight in gold. But, in many ways, sales professionals suffer from myopia just like academics and corporate executives who focus on sales funnels that already exist. The people and tools you need to guide you through the trial-and-error steps required to build a sales funnel aren’t available, because building one is such an entrepreneurial exercise—an exercise that’s idiosyncratic for each business.

3 In larger or more complex companies, the bottleneck may be in an additional process, such as hiring or money-raising.

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When you first start a business, the sales and production process won’t look nearly as polished as Figure 3. Instead, it looks more like Figure 4:

FIGURE 4. THE LONE ENTREPRENEUR STANDING BETWEEN SALES AND OPERATIONS

That’s because most entrepreneurial start-ups begin not with a functioning sales funnel and production process for “making and delivering,” but with the entrepreneur as a hustling salesperson shuttling between listening to customers to discover a “need” (usually one with a high-dollar product or service that requires personal selling skills) and finding a solution that will satisfy that need. This “hustle” continues in a trial-and-error process until the business fails, until the effort reaches the natural limits of an entrepreneur’s personal time or talents, or (all too rarely) until the entrepreneur stumbles into a more standardized sales funnel and production process that allows for efficient growth. Building a Sales Funnel from Right to Left For a business to grow, the entrepreneur must begin to delegate tasks to employees, partners, or suppliers with specialized skills, more capacity, or lower costs. This, however, requires some sort of standardization. The seasoned entrepreneur knows to build the sales funnel from “right to left,” delegating the simpler funnel tasks like building awareness (those that begin on the left) and retaining the more complex tasks like handling objections that require “on the spot” judgment (those near the end of the sales funnel). Below is a step-by-step example of how an entrepreneur typically builds a sales funnel, sometimes purposely, but more often by a trial-and-error accident that succeeds.

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Step 1—The Entrepreneur as a One-Person Sales Funnel4 The first task for most entrepreneurs is to make a sale—any sale—as he or she experiments with different offerings to ferret out a customer’s true needs, educates the customer on the comparative advantages and disadvantages vis-à-vis substitutes, closes the sale and provides an after-the-sale service. In a sense, the entrepreneur is a one-person sales funnel (Figure 4). Step 2—Building from the “Right”: Awareness, Education, and Qualification

FIGURE 5. THE FUNNEL BEGINS TO EVOLVE

Fairly soon, if revenues are growing, the entrepreneur will run out of the time and energy needed to manage all aspects of the sales funnel, particularly since he or she will likely be deeply involved in making and delivering a custom solution to the customer’s need. This means the entrepreneur is likely to delegate one of the “left,” or early, phases of the sales funnel as a first step toward standardization.5 Since it is the easiest to standardize through printed materials, awareness is often the first task to be standardized and delegated—creating a printed brochure, for example—rather than the more complex steps of education, qualification, or closing process (Figure 5).6

4A master entrepreneur knows to preserve his or her valuable time by looking for opportunities that promise the kind of intense customer needs that has few substitutes, and by saying “no” to price-sensitive customers, even when the business is below breakeven revenues. Otherwise, capacity fills with customers who refuse to pay for a service. 5Of course, at the same time, the entrepreneur will also have to look for ways to standardize and delegate the production and delivery process. Juggling the creation of production processes and sales funnels simultaneously is generally overwhelming, which is why most successful businesses start with either (1) a product that can be bought “off the shelf” from a distributor until sales volumes justify a dedicated production process or (2) a product that doesn’t require much of an intense sales process, at least in the early stages. 6Sometimes it may seem like when demand is high, there’s no funnel—an illusion that disappears when competition arrives, as it inevitably will.

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Step 3—Delegating the Education, Qualification, and Closing Steps

FIGURE 6. THE SALES FUNNEL BECOMES MORE SPECIALIZED

AS THE ENTREPRNEUR BEGINS TO HIRE AND DELEGATE

Eventually, if an entrepreneur wants to build a large business, every step of the sales funnel (and production process) must be standardized so that lower-cost methods and labor (advertisements, salespeople, order takers) can allow capacity to expand and unit costs to decrease (Figure 6). The Art of Designing the Right Funnel Through Trial and Error If you just look at the boxes on a flow chart, each step looks so simple. Of course it doesn’t work that way in practice—at least not in the real world. At the outset, each customer follows a slightly different path from the beginning of the sales process to close, so an entrepreneur must track (at least informally) the process, price, cost, and margins for each individual sale in order to start seeing patterns. This careful tracking and constant estimation of the cost and value is critically important, particularly in competitive businesses where an entrepreneur has a complex sales process or is initially trying to carve out a small niche.7 It is hard to overstress how observant and vigilant you must be to see the necessary distinctions between how individual customers move from awareness to close and—and how carefully you must gather data and track these movements. You must have a keen eye to spot what works, and you must conduct thoughtful and continuing small experiments to uncover new techniques and to train salespeople. For example, I once helped start a business where we bought small-producing oil and gas mineral interests over the telephone. At first, we tried to use low-cost telemarketing8 sales reps. We found we had to mail a thousand letters and make hundreds of phone calls to get just a few 7Columbia Business School Professor Amar Bhide makes a strong case that this process for discerning and delivering customer value is the most defendable asset for American businesses, because it is difficult to copy and next to impossible to outsource. 8There’s a big difference in cost and effectiveness between “telemarketers” who simply call and make a pitch, usually reading from a script, and “telesales” people who are capable of educating, qualifying, and closing a sale. At the time, I knew so little about direct marketing that I didn’t realize this.

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people to agree to sell us their interests. As a result, the business was failing. We simply didn’t have a talented enough sales force or an effective enough sales process to close enough offers to keep the business afloat.9 At this point, we switched to more expensive telesales reps and the close rates for our sales funnel increased enough to reach breakeven, but the business continued to struggle. Even with more talented salespeople, our close rates were too low. The conversion rates for the telesales force are shown below. Only 2.5 percent of the customers mailed had enough interest in selling their minerals to respond to our direct mail piece and talk to a telesales person. Of those who responded to the direct mail piece, our telesales force found that only half (50 percent) were “qualified,” meaning they owned the right size and type of interest and were eager enough to sell to make it worth valuing their interest and making an offer. Of those who were qualified, only 25 percent accepted our offer, leading to an overall close rate of 31 people out of each 1,000 direct mail pieces sent.

TABLE 1. INITIAL TELESALES MINERAL PURCHASING RESULTS YIELD AT EACH STEP IN THE FUNNEL

Finally, through a rigorous trial-and-error process, we improved the quality of our direct mail list, sharpened and tested the message on the mail pieces, and became more skilled at qualifying, valuation, and closing. There was no “magic bullet” or breakthrough insight, but rather a series of very small adjustments, learned at great cost, for each step. In all, we increased the overall close rate from 31 out of 1,000 people who were sent a direct mail piece to 42 out of 1,000.

TABLE 2. INITIAL VERSUS FINAL TELESALES MINERAL PURCHASING RESULTS YIELD AT EACH STEP OF THE FUNNEL

The improvement was small for each step, about a 10 percent improvement, yet in aggregate, the small steps amounted to a 33 percent increase in the overall close rate, which, when combined with a focus on more profitable customers, changed a marginal business into a highly profitable one. 9 All of the results in this example have been disguised for competitive reasons.

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The Analogy Between Sales Funnels and Production Processes In many ways, measuring the effectiveness of a sales funnel is like measuring the effectiveness of an assembly line. You can track (with a great deal of expense and effort) the path each customer takes from first contact to close. You can measure the average time it takes for a lead to turn into a prospect and then move to a final sale, the yield at each stage, and the “quality” of each sale by how much revenue it generates.10 By doing all of this, you can begin to understand how changes in the sales process affect the average amount of revenue generated per sale, the average total cost per sale and, thus, the contribution from each sale that goes to paying for the remainder of the costs of running your business. You can even monitor the amount you have invested in your “inventory” of sales leads, which is similar to the inventory of a manufacturing process and subject to the same risks of spoilage and obsolescence. None of this data is easy to collect. Far too many salespeople refer to sales “in the pipeline” without any rigorous way to measure continuous improvement of the sales process. Financial statements discourage attention to process detail because they are designed to track expenses by category, not measure how the expense per unit varies with changes in volume or improvements in technique. Plus, creating and optimizing a sales process is much more difficult than a manufacturing process. Metal that is shaped, sanded, and painted reacts in predictable ways according to the laws of nature. It is relatively easy to measure the quality and consistency of raw materials and to adjust assembly line machines to deliver predictable results within a band of tolerance. With sales funnels, you largely have inconsistent and unpredictable customers who are moved along by equally idiosyncratic salespeople. There are ways to make a sales process more consistent and predictable, but the difficultly should not be underestimated. These difficulties with sales processes are what make an effective and efficient sales funnel so valuable and so difficult to copy.

10Yield is the number of potential customers who move to the next step as a percentage of those who started.

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A More Detailed Example of Funnel Creation How do you build a sales funnel from scratch? The mineral interest example leaves out most of the trial-and-error complexities we faced in the business, so let’s take a simpler telesales business11 and try to follow how the funnel changes through trial and error. In this example, we’ll use the web-based product and process we use in Acton’s Cold Calling exercise, which allows our MBA students to practice making effective sales calls to entrepreneurs and CEOs. The “sale” is relatively simple. Students select a name from the list of CEOs provided, call that person, and try to convince them to log in to Acton’s website and sample a selection of material designed to help business leaders provide advice to aspiring entrepreneurs. However, this is more than a straightforward series of steps in an exercise designed to help students overcome their fear of cold calling and improve their cold calling techniques.

FIGURE 7. INITIAL SALES-FUNNEL MAP

After students try a dozen or so calls, we meet to debrief the first part of the exercise. In the discussion, it quickly becomes clear that the sales process is much more complex.

• The list has flaws. Some of the phone numbers are no longer working. Some of the “CEOs” turn out to lead one-person companies. In other cases, the business leader has moved on or even passed away.

• Many times, an executive assistant answers and acts as a fierce gatekeeper. • Occasionally, a business leader’s voicemail answers directly; at other times it is an

assistant’s voicemail. • Sometimes you catch a business leader in a good mood, ready to listen; other times,

the response is curt. • Some executives do lots of mentoring and advising, so they are interested in the

product; others do little or no mentoring. • Some of those who offer advice to aspiring entrepreneurs rely on their assistants to

screen requests and arrange interviews, which means the assistant may be the real customer.

• Some business leaders never use the Internet.

11 Both examples given in this note are telesales businesses because it’s relatively simple to map out the processes and conversion rates and follow the funnel creation. Remember that every business—without exception—has some sort of sales funnel, even if the steps are so compressed that the process seems to occur in one step.

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In addition, when we ask students to estimate the cost of a successful “sale,” it raises a fundamental question about what a “sale” is. Is convincing an executive to log on to the website a sale, even if he or she has no intention of using it again? Or is it finding someone who will use the site at least once or perhaps repeatedly? Are famous entrepreneurs our best “customers” because they get so many interviewing requests, or are we looking for those who are gifted mentors or those who need the most coaching to become effective mentors?12 The process of defining and refining the sales funnel is often a critical step to defining the ideal customer and, thus, the strategy of the entire business. The Sales Funnel After an Initial Round of Calls The sales funnel process looks quite messy now (Figure 8), and this is a simplified version of reality. Customers have and use many paths to get to a “sale,” each with its own steps, conversion rates, efficiency, and effectiveness.

FIGURE 8. THE COMPLEXITY OF A SALES PROCESS

12 Ideally, you will have defined your ideal customer and most pressing “need” before launching the business. In practice, it is impossible to be concrete and specific about customer needs or to identify the ideal customer until you have met and pitched a large number of potential customers.

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When we ask MBA students for suggestions on increasing the value of the average “sale” or decreasing costs, some focus on efficiency, others on effectiveness; some students focus on the early stages, others on later stages. Some students use Activity Based Costing to cost each step; others use Throughput Accounting to discover the value of relieving bottlenecks. Some students want better leads and are willing to work to upgrade their lists by electronically comparing lists to remove wrong numbers or unqualified customers. Others want to simply make more calls, increasing the number of closes through brute force. Some students want to reduce costs by standardizing a process, such as using a lower cost salesperson to get through the assistants; others would never consider this, finding the assistants to be a valuable source of information and referrals. Some students find that leaving voicemails is more efficient—when someone calls back, at least it shows interest. Others want to call before 8 a.m. or after 5 p.m., hoping that, if the assistant is away, the executive will pick up the phone. What’s the right answer? We don’t know yet. It will take many more calls, experiments, and calculations to find the most efficient and effective paths—probably thousands of calls. Left on their own, some students—usually the engineers, accountants, and other left-brained types—will chart a system so complex it collapses under its own weight. Others—mainly liberal arts graduates, artists, and other right-brained types—will lump so many processes together that the right path will never become clear. A few will chart the right paths, finding the processes that can be improved through standardization and lower costs, the places where the right talent will make the difference in awareness, and the times when hard work and higher volumes will lead to dramatically higher sales and lower average costs. Sometimes the breakthrough will come from luck, other times from a special insight or intuition. Perseverance and persistence will almost always be necessary. Most certainly, finding the better paths, cost structures, techniques, and talent will depend on a keen eye for finding customers with more intense needs and carefully logging and analyzing each and every call. Summary Far too many mid-level managers and corporate executives spend far too much time with white-collar marketers like themselves and far too little time on the salesroom floor with salespeople, carefully tracking leads as they move through the sales process to become customers and then repeat customers.

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The best companies pay special attention to improving their sales funnels, but even in these companies, the ability to build (or rebuild) a sales funnel from scratch is missing, perhaps because the existing funnel is taken for granted. That may be because sales funnels are built by founders initially, not in a deterministic way, but through careful trial and error, as the founding entrepreneur becomes too busy and has to begin standardizing and delegating tasks. At each step of building the sales funnel, an entrepreneur has to sell through trial and error by keenly observing the path that the most valuable customers take and by looking to improve the volume of sales and the quality of customers, while simultaneously lowering the average cost per sale. This process of constructing an increasingly effective and efficient sales funnel requires careful experimentation, a keen eye, intuitive leaps, and a fair helping of luck to identify the processes, skills, and judgment needed to make a particular sales funnel more effective. Despite the difficulty, building an efficient and effective sales funnel is well worth the effort. It is often the key to survival and, in the long run, the most valuable and defendable asset a company can own.