Rapid Optimisation of Your Sales Funnel to Improve Profit
The Sales Funnel is a well-known method of describing the several layers that a possible customer needs to pass through en route to becoming a customer. Each layer contributes more information about your business to the potential customer to encourage them to purchase. The Theory of Constraints (TOC) is an optimising technique that can show you the very first place you should look at in your Sales Funnel for maximum increase in sales and ultimately profit
This article will assume that you already know about the Theory of Constraints (TOC) and the Sales Funnel. If you don't, you should read our TOC article here and/or the Sales Funnel article before reading any further in this article so that you understand the terminology we use.
Exploit the Constraint
A Sales Funnel is arguably a workflow; just like a factory. The general public starts at one end of the Sales Funnel process and progresses through the several layers in the Funnel until a fully qualified customer pops out the other end. En route, various techniques are applied to the candidate customer to convert them from raw material, knowing nothing about our business, to being a committed customer.
In any workflow, TOC teaches us that there will almost certainly be at least one bottleneck/constraint.
Simplistic approaches to discussions about Sales Funnel improvements often demonstrate what can happen if each layer is improved by "just 10%". They leave you thinking that you have to improve every layer in the Funnel to get anywhere. In fact, as a starter, you only have to improve one layer; the bottleneck.
Why is this?
Unless, and until, the throughput of the bottleneck is improved, any improvements above the bottleneck will have no effect because potential customers cannot make their way through the bottleneck any faster.
Even though more leads may get processed in layers of the Sales Funnel above the bottleneck, because they cannot get through the bottleneck at any faster rate, any improvement in the layers above the Sales Funnel is futile until the bottleneck is found and its throughput is maximised.
Any improvements below the bottleneck are also wasted. All that effort will not lead to any further customers coming out the bottom of the Sales Funnel because the throughput of these downstream operations are completely dependent on the throughput of the bottleneck. Even though the Funnel is wider, there are no more people coming through the bottleneck than before.
Improving any layer in the Sales Funnel, other than the bottleneck, will not improve the productivity of the Sales Funnel.
We can go on to say that, in fact, it might only be necessary to improve the bottleneck by 10% to get the same effect as improving all the various layers of the Sales Funnel by 10%.
The opposite finding is, any effort that goes into the non-bottleneck layers of the Sales Funnel is effectively wasted and the time, money and human resources employed at those other layers is also wasted.
Clearly then, at the outset of improving the throughput of a Sales Funnel, one needs to only focus on the bottleneck in the system until such time as it is operating as effectively as possible. The good news is that focusing on just one layer of the Sales Funnel will avoid the risk of Multi-tasking by trying to improve each layer and avoid the dilution and wastage of resources of areas that don't presently need improvement.
To work on all layers of a Sales Funnel at once is a classic case of inefficient Local Optima (see Local Optima article).
How to Find the Bottleneck
The identification of the bottleneck should be reasonably straight forward if you have data of reasonable quality on the flow through your Sales Funnel.
If we divide the number of leads exiting a layer by the number of leads that entered that layer in the Sales Funnel we can express the resulting measure of efficiency of that layer as a percentage. For example, if 70 leads enter a layer in the Funnel and only 7 continue to the next stage of the Funnel, then the efficiency of this layer is 10% (7/70). If you measure the similar efficiency at each level in the Sales Funnel, the one with the lowest efficiency is most likely the bottleneck.
A second indicator of the presence of a bottleneck is likely to be a pile of customer leads trapped immediately above the bottleneck because they can't get through it.
Recapping, it’s likely that leads will be trapped in the couple of layers above the bottleneck and that there will be a distinct point in the Funnel (the bottleneck) where the throughput efficiency drops off markedly.
If you use Sales Management software that shows the progression of leads through your Funnel in a visual format, you will probably see a quick drop off in this visual representation at the point that has a bottleneck.
Elevate the Bottleneck
TOC teaches us that once we have found the bottleneck, we need to focus our attention on improving its throughput before we worry about improving the throughput of any other stage in the Sales Funnel process.
We could potentially elevate the bottleneck by any one or more of the following:
- Supply more resources such as staff, money, time.
- Move your better sales staff to this point in the Funnel so that you bring your best operators to bear at the point where they can have the most impact.
- Improve the sales pitch/copy at this point to have more people pass through.
- Improve or introduce better software to monitor the processes within this layer of the Sales Funnel process.
At some point, it is quite possible that the bottleneck in the Sales Funnel will move outside the Sales Funnel. This is called an "External Constraint".
We started with the Sales Funnel containing the bottleneck.
However, if the manufacturing/distributing system cannot produce product as rapidly as the Sales Funnel’s bottleneck can absorb it, the bottleneck is no longer a bottleneck. The manufacturing/distributing system, rather than the sales system, now becomes the bottleneck. It may sound unlikely, but in a well-managed sales system it is quite possible that the ability to generate sales can exceed the ability to satisfy them.
As a second example:
In a market with limited demand for your product (say hearing aids), once the demand is met the constraint becomes external to the Sales Funnel.
Clearly, this is a bit of a knife-edge situation because as soon as the production system becomes the bottleneck, we need to rapidly pull back the sales system into line with that external constraint so that we don't generate sales that cannot be fulfilled creating dissatisfied customers.
Start Beating the Drum
Once the bottleneck is resourced as best we can, we will use it to develop a Drum-Buffer-Rope to move the rest of the Sales Funnel into synchronisation (see Drum-Buffer-Rope article).
A good sales system is responsive to customer demand rather than production capacities. It is the ‘demand’ from the customers rather than the ‘supply' of the factory that controls the flow through the Funnel – and the production space.
If we tune our business to produce as much product as possible and then hope to sell it, we are going to find ourselves with large and expensive stock piles of inventory scattered through the business.
Best practice would indicate that it is much better to produce product in a manufacturing system, or to pull products into a distribution system, only once demand is created by the customer.
Therefore, the best Drum to have in a Sales Funnel may well be customer demand.
It is also true to say that the Drum is likely to have a maximum speed at which it should operate. Although we may have created customer demand, if the manufacturing/distribution system can't produce the product at the rate that customers are demanding it we will simply have unsatisfied and angry customers. This production capacity sets the maximum speed of the Drum.
In summary, the customer is the Drum but the Drum cannot beat faster than manufacturing/productivity.
A piece of good news about this is that you can now tune the size and skill set of the sales team by downsizing it to be just sufficient to sell all that the manufacturing/distribution system can provide. Any sales team resources above this amount is wasted. They will undoubtedly find something to do but Parkinson's Law (see Parkinson's Law article) and the wasteful aspects of Local Optima (see Local Optima article) will come into play. In other words, plenty of activity but very little extra productivity.
TOC teaches us that we should establish a Buffer in front of any of the Sales Funnel layers that are likely to starve the bottleneck if they fail to produce enough product (leads) as the downstream resources are processed.
The purpose of Buffers in front of (at least) the bottleneck is to ensure that the bottleneck always has sufficient sales leads to work with so that its throughput remains at the maximum possible. It is likely that some other places in the Sales Funnel, above the bottleneck, might also benefit from having Buffers.
For more on the location of Buffers and how to calculate their size, read the Drum-Buffer-Rope article.
Wasteful Inventory of Leads
In an "un-tuned" Sales Funnel, there is very likely to be leads piling up in various places other than the intended Buffers that we discussed above. These surplus-to-need leads may suffer from a large degree of waste.
This can come about because:
- Leads have a cost in time, money and human resources. If there are a lot built up then it means there is a lot of money and other resources invested in these piled up leads.
- Just like normal inventory, some of these will exceed their life expectancy and the investment is lost. Typically, a customer may lose interest in purchasing the product because their needs change or they purchase it somewhere else.
- Some of the leads will become obsolete. This could happen, for example, if the product changes or new models come out that mean that the lead is no longer likely to buy that product.
There will be variability in the rates at which the leads are processed through each of the various layers in the Sales Funnel. This means that we cannot accurately predict the rate of forward movement of any lead through the Sales Funnel.
There is plenty of research to demonstrate that having inventory piled up in front of each stage of a manufacturing process, or at regional and sub-regional depots if you have a distribution system, means that there will be a lot more variation in the speed at which the product moves through the system. This research goes on to show that the best idea is to concentrate as much of the inventory (that is not Buffer inventory) at the start of the workflow. This has the effect of smoothing out the individual fluctuations in demand at each layer and replacing them with a more predictable demand at the entry point of the workflow.
This means that leads should stay at the earliest stage of the Funnel so that they are available to be pulled through the Sales Funnel by the "Rope" (discussed next) as demand rises for the next customer.
A by-product of this is that the leads are stored at the least cost in time, people and money until the next one is needed to be pulled through the system. This has the effect of reducing the amount of resources spent on stock-piling leads throughout the Funnel.
TOC suggests the use of a "Rope" to pull new raw materials into the production/distribution workflow.
We have previously argued, in this article, that pulling new leads into the system should be triggered by a customer being created at the bottom of the Funnel. For more on this see the article Demand Driven Materials Requirements Planning (DDMRP).
As a lead turns into a customer, that triggers pulling sufficient new leads into the top of the Sales Funnel to eventually lead to the production of the next customer at the bottom of the Sales Funnel. If you start with 10 leads to eventually generate one customer, each sale to a new customer means the Rope pulls 10 new leads into the start of the Sales Funnel.
This can be happening in parallel so that as many new customers are created at any one period as possible.
The ability to create new customers will be subject to the maximum capacity of the bottleneck. Once that is properly elevated, it will depend on the ability of the manufacturing/distribution system to supply the physical product. This cannot be exceeded without customers becoming angry because they are not getting products they want due to the inability of the manufacturing/distribution system to supply.
This article has shown how the TOC Optimising techniques can be applied to the workflow of the Sales Funnel to help make it as optimal as possible. It achieves this by focusing on elevating the bottleneck layer in the Funnel to its maximum capacity.
It has also shown that pouring too many leads into the top of a Funnel, thereby creating inventory, can be wasteful and expensive and is not necessary.
Further articles can be found at the Theory of Constraints Menu.