Sales Pipeline vs. Sales Funnel: Do You Know the Difference?

Analyses of sales patterns are among the most important tools a business can have. Businesses exist to make a profit and businesses realize profits through revenue from sales. Businesses survive and thrive by determining the factors which influence sales. They have to tweak them to the business’ advantage and to maximize possible returns. Tools that are useful for analyzing sales patterns include sales pipelines and sales funnels. Although the two are related, there are fundamental differences. These differences provide different insights into business sales cycles.

The Reasoning Behind Sales Management

There are several reasons why analyzing patterns in sales are paramount to being a successful business. Firstly, managing cash flows determines whether a business can remain liquid or not. If there are financial obligations that are not met there may be consequences. Consequences impact the entire business even if the operations of a business are profitable. These undermine the success and longevity of a business. Every business requires capital. Most businesses rely on some level of debt to fund their assets and operations. Debt comes with interest payments as well as principal repayments. If a business misses payments due to a mismanaged cash flow, there are negative outcomes. This impacts the credit rating of the business. As a result, incurring debt will become more expensive. As such, predicting and managing revenue streams is an important part of business management.

Another important aspect of managing sales is the ability to forecast. When decision-makers do not understand trends in sales, making important decisions becomes difficult. Decisions about investment, marketing and hiring become guesswork about what the business needs. Investments into assets determine how much a business can produce to meet customers’ demands. Sales analysis provides data for that. Marketing strategies influence the number of customers which the business can attract. Human resource management and hiring policies determine the production capacity of the business. Additionally, a significant number of businesses have seasonal fluctuations. Regardless of which industry a business is in, its products or services will not always have constant levels of demand. As such, analysis of sales is an important aspect of businesses. In the next section, we will analyze two important tools for sales analysis. The sales pipeline and the sales funnel, how they differ and the advantages they can bring to a business.

The Sales Funnel – Overview

There are some essential differences between the sales funnel and pipeline. Firstly, a business engages in marketing to attract new customers. Potential customers are often facing a specific problem or issue. A business may be able to solve it through one of its products or services. If marketing is effective, a potential customer gains insight into a need they may have. They become aware of the brands available to meet those needs and develop a preference for certain brands. This entire stage is done with little involvement from the sales team, only marketing. This is when the first contact with the business or client is made. In this second stage, the business attempts to understand the needs of the customer. This through their sales department. On the other hand, the customer orientates themselves with what the company has to offer. Customers may indicate their intention to purchase a product or service at this stage. It is up to the sales department to convert this lead into a sale and possibly a loyal customer. These stages essentially describe a sales funnel. Both the Sales and Marketing departments are responsible for a sequence of activities and events that lead customers toward purchases. Hopefully, this results in ongoing relationships. This entire process can be described from the customer’s or seller’s perspective.

The Sales Pipeline – Overview

Some businesses have a dedicated sales department. This department communicates directly with potential clients. The process from lead to the client often has a series of milestones in their sales cycles. When a typical potential customer transfers to the sales department in the second stage of the sales funnel, they already have an idea of the brand they are working with and the potential solutions on offer. It is up to the sales representatives to take a series of steps to convert that potential lead into a closed deal. There are many milestones in the sales pipeline. Regardless of who makes the initial contact, the first milestone is usually the first call or meeting with the client. In this meeting, the discussion will most likely focus on what the potential customer’s needs are. The sales agent matches the solutions provided by their company to the client’s needs. The next milestone happens once the sales agent and the potential customer are on the same page about an appropriate solution. Focus switches to the customer’s ability to make a purchase. Once that has been established and a possible price is agreed upon, there is an on-boarding process during which contracts are signed. Payment may not be immediate but, at this point, revenue becomes probable.

The Major Differences Between the Sales Funnel and Sales Pipeline Analysis

The differences in the usefulness of sales funnels and pipelines can be analyzed from differently themed perspectives. The sales pipeline is useful from an operations perspective described in the first section. It reveals details about sales forecasting and, revenue and cash flow management. It is undoubtedly vital to the business. One other fundamental perspective is from a marketing point of view. It is from this point of view where sales funnel analytics truly distinguish themselves. They are indispensable for businesses and can a big impact on profitability.

Marketing Costs: Overview

In a business that utilizes marketing to acquire sales leads, there are costs associated with the acquisition of potential leads. Advertising campaigns, for example, cost a specific amount of money. They generate a certain number of leads for a business, depending on the success of the campaign. An ad could go viral and inspire a cult-like following. However, it could go wrong and business could end up spending millions in ad campaigns. Just for Feet, the business could get only brand damage and failed lawsuits in exchange. The issue is not always that extreme. However, there are such high advertising costs. This is due to the number of devices, platforms, programs and social media competing for the attention of consumers. As such, a business should know if the money spent on ads was beneficial.

Cost per Lead: Marketing Effectiveness

Most emerging companies face a market that does not recognize their brand or the solutions they offer. Sometimes, the market is unaware that they need a certain product. It is now difficult to imagine a world without the information and services enabled by the internet. This is within reach in most people’s pockets. Yet, when the concept of smartphones came up, most of us were not aware we needed them. As an innovator of a fantastic idea, an entrepreneur must, unfortunately, also bear the cost to raise awareness of the unique products and services they offer. In current times, there are so many options on offer. These include traditional media, online streaming services, in-app advertising. Also, there are billboards (yes, they still do exist), print media and even through product placement. Each one of these options reaches a different demographic and costs vary. Not everyone who becomes aware of your brand engages it, perhaps through a conversation with a sales representative or by sending a contact request. But those who do may market your product through word of mouth or become customers. That adds value to the business. Cost per lead analyses how many individuals out of the total targeted became aware and engaged with the brand. This way, the business can determine which is the most cost-effective form of marketing for leads but this is only one side of the coin.

Cost per Acquisition in the Context of Customer Lifetime Value

Where cost per lead (total cost of a marketing campaign/total new leads generated) is the price you pay to get a potential customer interacting with the business, cost per acquisition (total cost of a marketing campaign/total new clients) is a cost of gaining new business. A profitable business will always make earnings from new customers. Regardless, how much the business gains in comparison to the cost of the marketing campaign is an important question to ask. An example is a new food delivery app hoping to compete with Uber Eats or any other delivery service. As such, they launch a marketing campaign on Facebook because it is the most cost-effective form a cost per lead basis. They offer $2 off for any order. In such an industry with tight margins, this is easily a loss-making exercise. Regardless, they hope that they will gain new loyal customers and make up the difference in time. However, it turns out that customer loyalty is fleeting in a young, unpaid Facebook crowd. This market segment discovered the campaign. They joined the platform with the sole purpose of making a single order exploiting the discount. Sales funnel analytics enable a business to segment its market and determine where the clients with the highest customer lifetime value are. Perhaps in such a scenario, the firm should have paid extra for a television commercial during a popular drama. This may have attracted a potentially more loyal and higher-earning customer base. This is the strength of complete funnel analytics. It is the ability to determine a successful marketing strategy.

Conversion Rates: Sales Team Effectiveness

When the marketing team has done its part and got the leads talking to the company, it is up to the sales team to convert leads into deals. Sales teams that typically have a commission-based remuneration package exist primarily to make the business money – revenue. The sales pipeline can be an effective measure of performance over a period. When heading towards the end of the year, one sales agent may earn the company $1 million to date. That agent may appear ahead of one who has earned the company half of that. But if the latter agent has an additional $2 million of probably realizable income when the former has half of that, using a sales pipeline tools will paint a clearer picture for performance appraisals.

But studying the sales team’s effectiveness goes beyond understanding the current realized and probably realizable revenue. Imagine sales agents are assigned, ten random clients. Each client could bring a revenue of $50k or $120k, for example. One agent might convert 6 out of 10 of their $50k leads, a formidable conversion by company standards. This would bring a revenue of $300k. Another agent could simply target 3 high earning leads to get a revenue of $360k and be content. In the process, the agent may neglect two convertible leads who would have brought in an extra $50k each. Using sales pipeline nominal values alone could create unintended outcomes by mismatching the goal of the company and the incentives of the sales team. Funnel analysis would expose these trends and improve earnings.

Applying Sales Funnel and Pipeline Analytics

There are significant differences in the two analytical methods, the Sales Funnel and Sales Pipeline. But, they can be combined to ensure that the business is meeting its performance targets. Sales pipelines track cash flow issues. They could be used to ensure a business prepares for seasonal demand fluctuations and mitigates against the threat of illiquidity. Sales funnel analyses are used to gauge marketing effectiveness. They also reveal target market appropriateness, customer lifetime values, churn and retention rates. Ultimately, the tool monitors the profitability of the business.

There are several useful solutions which are offered by platforms like IronFocus. These enable businesses to carefully analyse their sales funnel to improve the performance of their businesses. The use of data science is on the rise. It can be used to improve a range of things including customer loyaltymarketing strategies and the multitouch attribution in the sales funnel. These solutions are not just a source of competitive advantage but are drivers for long term success for every business.

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