The Extremes of the Sales Funnel

Opening disclaimer: To prove the validity of this post not everyone should read it until the end.

Why? Read until the end if you like, but then I risk you prove it wrong, just by reading it?!

This post will indicate some dangers to avoid when optimizing sales processes.

If you are professionally involved in sales process, you must have already stumbled upon the concept of a sales funnel. Either you were asked to design or manage a sales process or you were reminded by a boss about your priorities and responsibilities using a diagram of a sales funnel.

In short we can say that a sales funnel is a model of a sales process which defines sequential steps that are required to extract revenue from a given market potential. The model strives to be optimal in the sense of revenue versus sales costs index. In other words, the model shows how much effort should be invested at a given stage of a sales process to maximize the overall revenue gain.

An example of a sales funnel.

Image courtesy of www.getentrepreneurial.com

A typical sales funnel has a shape of a cone. An example is illustrated in the image on the right. It is wider at the top and gets narrower as we move down. The top of the funnel is abstract and strategic, the bottom is objective and tactical; the top deals with (almost) infinite number of instances, the bottom deals with relatively small number of instances; the top is handled by marketing departments, the bottom is handled by sales departments.

The cone shape of a sales funnel tells us that in order to be optimal we should address a wide audience at the top, but spend relatively little per each instance. On the other hand, we should carefully select a smaller subset of instances at the top and spend progressively more per instance as we move down the funnel.

There are numerous indicators which describe the properties of a sales funnel. I would like to point out one such indicator to show how misleading sometimes a very straightforward goal to optimize a sales process is.

Let us take a look at the conversion rate indicator. This indicator tells us what percentage of instaces is moved to the next stage in the sales funnel.

Suppose we have a company with an infinite market, meaning there are more potential sales opportunities than we can theoretically close. In other words, the potential exceeds the capacity of the company.

Consider now this case, "The company claims they have a 100% conversion rate. Is this optimal for the company?"

What does this mean? A 100% conversion rate means that every instance entering the sales funnel is also exiting it at the very bottom when the sales successfully closes the case. This also means a sales funnel is no longer cone shaped, but cylinder shaped structure. This company has a sales cylinder.

Is this good or bad?

It depends upon which cylinder it is. Consider the two diagrams below.

Type A and Type B cylinder shaped sales funnels.

The company may think they have a type A cylinder, but I claim they have a type B cylinder, since type A is theoretically impossible. Remember, there are more sales potentials than the company can service.

This means this company is exposed to huge risk. This does not mean they can close every deal that they pick; this means they have to close every deal to survive. They are suffering from low market awareness, which is why they have to take any deal that comes along. There is no room for optimization. Every deal has to be closed.

If they had a cone shaped sales model, they would have the luxury to pick opportunities and optimize. Sure, their conversion rate would be less than 100%, but that is good. That would give them the leverage to optimize.

A cylinder shape would only be acceptable in cases where the market potential is small. Meaning the company has the capacity to theoretically service all the customers in the market. But then again, that case is not very interesting by its definition.

Therefore, when optimizing a sales process, analyze all stages. Remember, your prospects have to come from somewhere, and some of your leads have to be positively closed to have a successful sales process.

Do not overoptimize! Some instances will fall out of the process and that is good!

Closing disclaimer: I hope not every one of you is reading this, as this would prove the post is meaningless.

Only the Best Products Get Sold!

This is obvious, and yet many product managers do not pay enough attention to it. Every time a product is sold, the buying decision is made on assumption of the best choice made by the customer. Therefore it is always the best product which gets sold. The customer would never go for his second or third best choice. The purchase decision is always customer's first best choice.

Why?

Nobody can force the customer to buy anything less than the best according to what he is looking for. There exists no other force, which would influence the decision. Naturally, the customer always chooses the best product.

Still you can find many products on the market, which address the same problem. Yet this is not contradictory to what is said above. The premise states that the customer always decides for the best product for him. Different customers usually make different best choices. This means that customers possess different criteria for selecting the best product. In other words, different customers have different ways of satisfying the same need, but each particular purchase decision is made on assumption of the best product selection for that particular customer.

What does this tell us about product design strategy?

If you want the product to be sold - ever, it has to be designed in a way that it will be selected by at least one customer as his best choice. Not second best or third best! It has to be the best for at least one customer according to his purchase criteria.

Have this in mind when designing a product. It is by far the worst strategy to design a product in a way that it is mediocre in every aspect. Not only it will never be selected in purchase decisions of your customers, it will also mislead your market research. You will detect a lot of interest, a lot of potential, which will later on never be realized. You will always lose, maybe just by a little bit, to the best product for the customer. Think about it, if this is frequently happening to you.

What you should do is think carefully about your product. Is there at least one criteria according to which your product is the best on the market for a customer segment that you are aiming at? You need to be clearly the best! Do not fool yourself by thinking that you can get away by being among top three. On the other hand do not worry, if there are some other criteria and customers according to which you are not very good at.

Sometimes a purchase decision criteria is combined from several elementary ones, like for example price/performance ratio. Nevertheless, it is still a single criteria and it should be considered as such, if you decide that this is where you want to build an advantage with your product.

Remember, being always in the middle is not a good strategy for product development. Find at least one purchase criteria for a product, where you can clearly deliver and present the best solution in the market and make sure you execute that strategy perfectly, then your success will come naturally.

What's Happening? Who cares!

Until recently Twitter prompted us with a question "What are You Doing?", which is personal and so common that it automatically challenges a reader into reaction. This question has been replaced now with a more distant phrase "What's Happening?", which is less personal. It also does not draw as much attention as the first question did.

Why?

Because it is not about me - the average user and because I do not care what is happening, unless it is happening to me.

It is true on the other hand that Twitter has grown a lot since its beginning. It has been used for many different purposes from personal status updates to all kinds of marketing and social networking. Looking from this perspective, the old question looks a bit narrow, but I think the authors could have come up with a better question.

Let me give some suggestions what would work better and still be aligned with today's multipurpose social hub that Twitter certainly is.

What is Happening to You?
What do You Have to Say?
What would You Like to Share?

These questions are focused on the user. They show interest in the user's opinion and they want to hear his/her particular statement. Questions like these are much more likely to generate (enthusiastic) response than the new official question.

What do You think about this article?

Trade Shows, Why are They (Still) Here?

If you are coming from IT industry, then you have probably already heard this claim, "Public business events are going to be replaced with internet technologies like web, webinars and social media."

And yet trade shows are still here. Why?

One thing is true. Internet technology offers strong means for almost any company to present their products and services to the world. Besides presentation there are also several options available for promotion like sponsored links, banners and promotional video clips. In most cases a company can build a technically more convincing presentation on the web than at the trade show. A promotion on the web can last forever. Usually, a web based promotion costs less than a public appearance at the trade show.

But trade shows have one unique advantage, which could never be replaced with web. They are personal, first hand, human, if you will. They are more aligned to a human nature than internet technologies. People go to trade shows not just to see products, but mostly to meet people, potential business partners and customers. Intuition and intangible quality play a major role here.

That is why I think trade shows are still around and they will be here for quite some time, until we discover a way to transfer authentic personal touch over the web - if ever.

Competitive Edge is Really an Edge

This post is a bit more formal. It contains some definitions and graphs. Generally I try to avoid abstract language, but in this case I found formal explanation to be very suitable to carry my message across to you. I hope you will find it useful and inspiring too.

Start-ups and companies undergoing radical reforms at one point or another start thinking about their product portfolio. The most mind-boggling questions are; Which capabilities should I turn into products and offer to the market? How wide should the portfolio be? How will I satisfy my customers who want the impossible t.i. the best products (not just good!) for all their demands?

Since I was recently involved in similar processes several times, I have given a lot of thoughts to this matter. I found out some clues which, I hope, will help you design your product portfolio.

Let us start with some definitions. Say your company operates in some particular field of business. Let us denote this area with D - domain of your business. Domain D represents all the possible products you could provide for your customers. In other words, D represents all possible needs or problems your customers could have.

Your company, which operates in this business delivers products, which satisfy some of the customers' needs. Some needs are better addressed than others, but in general your offer for the market could be represented as a function of added value over your domain v(d). See example in Figure 1.

Figure 1.

The curve in Figure 1 shows that you are covering approximately one third of customers' needs and that you are particularly good at solving problems near the peak of the curve. Let us denote the problem for which you provide the largest added value as D₀. In other words D₀ represents your company's competitive edge. See Figure 2.

Figure 2.

If provided value V₀ is one of the largest in the market, then you are probably the market leader for product D₀. But what if this is not the case? What if there is a competitor providing much better product than you are? Let us denote your competitor's added value for product D₀ as V_M and let us say that this is the current maximum value provided for the market. Therefore your competitor is also a market leader for the product D₀. This situation is sketched in Figure 3.

Figure 3.

As you can see in Figure 3, the value provided by your company is much smaller than the value provided by your competitor and market leader. To make things even worse, this is happening where your biggest strength should be - at the peak of the curve. Obviously, you need to "grow" the peak to match your competitor.

Can you?

Yes, you can!

Here is how. The area under curve is your company's capacity, which is constant. The capacity, let us call it C, is limited by the resources of your company. These are people, knowledge, brands, capital, etc. See Figure 4.

Figure 4.

Therefore, you can not expand the capacity, but you can modify the curve as you like as long as you preserve the area under curve. For example, you can decide to widen you product portfolio (Figure 5) or you can decide to shrink it (Figure 6).

Figure 5.

Figure 6.

Which one do you think will reach the customers? Offering lots of (under) average products or offering a small set of exceptional products?

My bet is the latter.

I would go even further and I would not settle for "just good" products. Just good is not good enough. It is too risky. I would squeeze the value curve as much as needed so that the top would stick out of the current best offers. Today, in globally connected world, it is really hard and risky to offer "just good" products. The customers have lots of information and relatively easy access to any company in the world.

Now, let us say you specialize. You focus and dedicate your resources to the product you are the best at. Unless you are a giant multinational corporation, your value added curve looks similar to that in Figure 6.

When you visit some customers, you find out that they expect the best products, but at the same time they expect you to address a majority of their demands. Let us sketch their expectations with a value added curve. See Figure 7.

Figure 7.

That might seem scary at first. Your company clearly cannot realize their expectations, since the capacity in Figure 7 greatly exceeds your realistic capacity. Compare Figure 6 and Figure 7. Area under curve in Figure 7 is much larger than that in Figure 6.

What now? Did we get it all wrong?

No.

It is time that you get partners t.i. companies which deliver the best products; products which you intentionally left out to be the market leader for D₀. Look for companies, which are similar to you, which have a narrow added value curve and which curves do not overlap too much with your curve. This should not be hard now. Almost every company, which operates in a niche wants to cooperate with the best companies which help it complete its portfolio just like your company.

Imagine how impossible this would be, if you had a wide, flat added value curve. Like that drawn in figure 5. Do companies want a partnership with another company which offers (under) average products? Do they want a partnership with another company which offers competitive products besides a little bit of everything that it does? I guess not.

When you go looking for partners, make sure they are the best at what they do and that their product portfolio does not overlap too much with yours. Only this way your company and your partners can realize your customers' expectations. Figure 8 shows an example. See how this figure is getting closer to Figure 7, which shows customers' expectations.

Figure 8.

Connect as much partners as needed to complete customers' vision, but be very conservative when thinking about delivering some new product far away from D₀ yourself.

When Challenged Use the Chicken Argument!

Today's topic is not a new one. I decided to write a few words about it, because I still face this issue from time to time. It is about speaking the right language, knowing your customers and knowing who is on the other side, when you are trying to get the message across. The problem was extensively studied by several authors Adele Revella, David Meerman Scott, Steve Johnson and others.

So, what is it all about? Years ago, when I started my work as a product manager, whenever somebody asked me if I can create a presentation of a product, I immediately knew what to do. My presentation was done in a very short time; it required no particular input from colleagues or customers (I knew it all, I was a product manager!) and it spoke a magnificent persuasive language.

Which language?

My language.

There was a problem with that. The customers were not product managers. They saw the product through their eyes. They were expecting answers to their problems, not an expose of my beautiful achievement. The message did not get to them, because there was no message for them.

I figured it out, eventually. In order to be listened to, I needed to convey the value of the product from the customer's perspective. Although there was a single product, there were as many perspectives as there were distinctive market segments. I needed a customized presentation for each market segment.

Since then whenever somebody asks me to prepare a presentation of a product, I immediately ask back "Who will be listening?" In some cases I still get a strange look questioning me "am I trying to avoid the task by asking annoying questions?" In these cases I need a simple persuasive argument to explain why knowing a listener is so important. Here is what I am using. You can try it too.

"Let us say you would like to present the value of corn to a farmer. How would you do it?

Further on, how would you present the value of corn to a cook?

Would you be more persuasive with two presentations or just one for both of them?

If you still think that corn is corn and there is no reason to present it differently to a cook as you would present it to a farmer, try this one -

- How would you present the value of corn to a chicken?"

Long pause.

"Are you kidding me?! You need a break - soon. Here is your customer profile."

;)

How I Fought 12 Buyer Personas and Survived

Bottom Up Approach to Market Segmentation Using Buyer Personas

My latest post on buyer personas caused quite a strong response from you - the readers. I guess this is a hot topic and a lot of you are involved daily in tasks which require some kind of market understanding. Buyer personas help us understand how our market is segmented and what kind of distinctive problems do buyers from different segments have.

If you want to have a good understanding of the market, the number of personas has to be just right. Have too much personas and you will not see a thing (a pattern) about the market. Have too little personas and your communication will be too general and nobody will listen to it.

When first managing a project involving buyer personas I had two questions in my mind: How do I know which is the right number of personas for my market? Is there a methodology which would lead me to a good number of personas?

I discovered that in my case buyer persona identification is a two dimensional problem. The first dimension is represented by the industries that we want to address and the second dimension is represented by the business roles that buyers have inside industries.

In my case there were four industries and three business roles. Three business roles are quite common, if you are working in B2B market. Usually you need to convey value to three distinctive roles in an organization: commercial buyer, technical buyer and user.

I did a simple sketch, showing my personas in a grid.



A quick look at the grid and a simple math told me I am facing a huge task, if I would really need to create and maintain 12 buyer personas.

With confidence that there must be something along the way to help me overcome this number, I started with buyer persona profiling project.

Luckily, I found out through the process that there are some persona profiles which should be merged, because they represented buyers with equal problems and they also spoke practically the same language. It turned out that technical buyers from all four industries could be effectively represented with a single buyer persona and also that end users from the first three industries had a single persona. I updated my grid immediately like this.



In this stage I had 7 buyer personas. Therefore, I managed to cut initial number almost in half without losing the specificity given our market structure.

During this process, it was also decided that we were going to address industry D through industry C, which removed additional two buyer personas, so I was left with a manageable size of 5 buyer personas.

In conclusion let me answer my initial two questions in short. Start a buyer persona identification process so that each industry and each business role from that industry is represented with an unique buyer persona. Look for similar profiles and merge them. Stop when you cannot find any more profiles to merge without introducing impurity in descriptions of their problems or solutions to their problems.

This method worked well for me, I hope you will find it useful too.