Sales Funnel or Sales Pipeline Which is Right for You

Business Model Concept (Photo credit: Alex Osterwalder)

Is a sales funnel right for your business, or would the sales pipeline be a more appropriate philosophy? Do you know the difference between the two? And do you know how that difference impacts your bottom line?

There’s a lot of folk lore, and hearsay, in the world of sales. Understanding of the art, or science if you prefer to call it that, is passed on mostly by word of mouth. There is no definitive explanation of ways the professional goes about its work. Junior sales people learn from their bosses and colleagues while others not involved in the job pick up some of the words they hear used. No wonder there’s confusion and disagreement about what’s right, and what’s wrong. Everybody with an opinion has a different perspective on what the words mean.

Two recent articles illustrated the point. Are you selling values or selling value? showed there’s some deep thinking required when matching a value proposition with a sales strategy. Why the Sales Funnel is Bad for Business explained sales operations models need equal attention. Both seem confusing messages, turning simple ideas into academic conundrums. But they aren’t. Knowing which to choose, and why, is critical to cost of sale, and that is every bit as important as revenue.

The sales funnel is right for any business which has a large pool of potential customers, a relatively small individual deal value, and a cost of sale close to zero.

The opposite is true for the sales pipeline. Businesses with a small pool of potential customers, high individual sales value and measurable cost of sale should adopt the sales pipeline method.

Get this right and you’re in great shape to make a profit. Get it wrong and your business model is toast.

Two simple case studies illustrate the differences in method and results.

In the first, the Internet Marketer sells some sort of ‘How to Make Money With Your Blog’ proposition. The pool of potential customers is effectively infinite. Location is irrelevant. Marginal sales value – the revenue from one additional customer – is low, and marginal cost of sale – the cost of making that one deal – is close to zero.

The Internet Marketer quite rightly adopts the sales funnel concept. She approaches her large list of email addresses with a series of propositions, each of which brings the punter closer to the sale. It starts with free advice. Next, it moves on to conversation in a web conference. The pre-announcement comes next – coming soon, limited availability, discount for early registration. Then comes the sales pitch and close. Three months later she repeats the process for the punters who didn’t make it to the end. For the ones who did – the now loyal but slightly disillusioned customers – there’s another cycle for a different pitch.

You’ll understand why this is known as a funnel. It’s like herding cattle into a pen. Or like fishing with a net. It’s a volume strategy. Start with a big number to finish with a small quantity. The biggest advantages are 1) every prospect is treated the same, so it’s simple and 2) the cost of each iteration of the series of pitches is minimal – mostly just an email. A $100 sales value with a $0 cost of sale makes very good business in anybody’s language, provided there are enough deals. With that cost of sale any business can pitch 100 punters, or 100,000, or 1,000,000. When people talk about sales being a numbers game, this is the model they refer to.

In the second case study the insurance agent invited to bid for a commercial renewal has a different set of problems. The annual premium of $100,000 earns a commission of $30,000. That’s a lot of change, and worth some investment in cost of sale. More than you might think. If he does a good job, he might keep the account for 5 years. That’s $500,000 in premiums and $150,000 in commissions.

The deal needs to be worth a lot to the professional insurance agent, because there’s a lot of work required for a successful bid. He has to do a better job of understanding everything about the client’s business than the competition. He has to do a better job of structuring the insurance cover to suit the insurance company than the other guy. And ultimately he has to persuade the senior management team (including people with personal agendas) he’ll be a better business partner than the incumbent. The cost of this sale could easily reach $10,000, or even more.

The insurance agent couldn’t bid for everybody’s renewal. He’d be bust after losing a few deals. He’d do a poor job of selling to the ones who might buy, because he’d be busy selling to the ones who won’t. The sales funnel is as much use to our guy as a bucket with holes in it. He needs a sales pipeline.

With a sales pipeline the decision as to whether to pursue the deal is made early. Then the sales process is managed to a successful outcome. Low probability opportunities are discarded at the start, so valuable time and cost of sale can be dedicated to to winning the higher probability deals. Quite how to manage a sales pipeline is a science in its own right and the subject of our tutorial Sales Probability Process Management if you’d like to understand more about it.

None of the above suggests either sales funnel or sales pipeline is intrinsically good or bad. They are both appropriate in the context of the right business model. Equally, they are both wrong in the context of the wrong business model. Unfortunately, most businesses don’t understand either model properly so choose a mixture of both, with mixed results of course.

Aligning an engaging value proposition with the appropriate sales operations model should be fundamental to any business strategy. If you’d be interested in knowing more about how to do that check out our eBook Succeeding in Sales Management.