We’ve all heard about sales funnels and how we all have one or need one. What does this mean, especially when starting out?
Attention Costs
Getting someone’s attention has a cost attached to it. This is the brutal truth about business. You have no chance of selling unless the right people pay attention.
The first thing to be aware of is costs. Your sales must exceed costs. Sales are easy to calculate. However, be aware that once you have a customer, they may make more than one purchase. So, they may have a Lifetime Value beyond your first sale.
So what are the costs?
Costs are in money and time. Your time has value and if you put a lot of time into meeting prospects, this impacts business success.
How many steps are there between first contact and first sale? Each step increases costs. I normally first encounter people through networking or speaking. I meet interested people over coffee and usually sell at that stage. Some funnels have four or more stages and each stage adds to costs.
With a financial value to the initial cost that brings prospects into your funnel, you can calculate the overall cost of turning a prospect into a customer. If that is less than the lifetime value of the customer, you have a business.
I’ll share some of the calculations below. For beginners these calculations are something to be aware of but not necessarily to worry about at the stage you are at.
Your focus is on developing offers you can sell and learning how to sell them. You need to practice selling and so a funnel with minimal steps and low success rate is what you would expect at the start. As success increases, so will your capacity and funnel calculations become more important.
Your Funnel
- Every business has a funnel although not every business is aware of it. So, can you describe your funnel? How many steps must a prospect pass through before they become a customer? What are the steps?
- Have you any idea of the lifetime value of your customers? Do they buy once or are they likely to come back for more?
- How likely are your customers to pass on the word to other prospects? How much of your funnel do these prospects pass through?
Calculating Costs
To make meaningful calculations, you need experience. You need to monitor prospects and costs. If you monitor from the start, it helps. But it is unlikely your practices will be the same once you are established. Early stages are likely to involve a lot of chopping and changing, so you may find these calculations make more sense once your business works to a regular pattern.
However, it is helpful to be aware of what’s going on beneath the surface, even if you don’t have monitoring in place.
You need some idea of the cost of getting someone into your funnel. Sometimes this is straightforward, eg a pay-per-click ad has a clear cost for each click. If you speak at an event and 10 people sign up, it is the cost of preparing for the event divided by 10.
Let’s say the cost of one person entering your funnel is £5. Estimate the percentage of people who move to the next stage of the funnel. Say 5 of the 10 people who sign up attend your one to one. And 2 buy your offer. So, 50% turn up and 40% sign up.
You divide £5 by .5 and then by .4 and this means the cost of your customer is £25. This is actually a reasonable cost and many businesses would be envious. What happens if the cost is £5000 or more?
Mitigating Costs
Two things mitigate costs. The first is lifetime value. If customers make further purchases they may exceed the initial cost over time. This works better for some businesses than others. It is always worth asking what else you can offer a customer who trusts you.
Second, a satisfied customer may tell their friends and this can slash the cost of your funnel, especially if customers enter your funnel towards the end and are more likely to buy because of the recommendation.
If this happens often, you have an hourglass, where as many enter your funnel towards the end as enter from the top.
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