Last we took a look at Revenue and walked through how we arrive at Revenue as a result of Operational Activities. This week we are going to work our way back to Customers.
If you remember when we talked about Revenue, we applied factors to the Number of Customers to be able to achieve the results that we want. The problem that we have is that the Number of Customers are a result of different Operational Activities. There are plenty of definitions for these activities and many companies arrive at these slightly differently. But the basics are pretty straightforward.
To start with, we have Prospects. Prospects are those people or businesses that have some amount of interest in your products and services. They can arrive at your doorstep in many ways. Creating Prospects is the job of Marketing. We will talk about that in another post and how that evaluating the numbers in your Marketing processes can be very helpful. But once the Prospect has arrived at your Doorstep, it is the time for Sales to take over.
Most larger companies have a formal Sales process and many of them use a tool called a Sales Funnel. I won’t go over that in great detail here, but what a Sales Funnel does is try to qualify the likelihood that a Prospect will become a Customer. In general, Prospects fall out of the funnel as they progress from stage to stage of more likelihood to purchase. At the bottom of the funnel, Prospects will be converted to Customers. The percentage of Prospects that become Customers is called the Conversion Rate. Nobody converts every Prospect into a Customer, so this is generally expressed as a percentage less than 100%.
However, taking a look at the percentage gives you some time to think about the Cost of Sales associated with a Customer. You have to spend time and resources walking Prospects through your Sales Process. The time and money are well spent on the Prospects that become Customers and not well spent on those that don’t. So, one of the best ways to make your business make more profit is to improve your Conversion Rate. You can accomplish this in many ways. Some examples are to improve your Sales Process, provide Sales Training, and improve the Prospect Quality. Each of those elements can make your Conversion Rate improve. Each percentage point of Conversion Rate improvement means that you have to spend less time and money gaining a new customer. That is why this process is so important to understand and improve. Sales is a constant in any business and if your Sales function works better, you will make more money without making any other changes at all.
What could you change in your Sales Process? Well, you can see if your Sales Presentation is effective at addressing the needs of your Prospects. Does the quality of Sales Collateral match your Customer expectations? As you think about it, there are plenty of ways of going about the work of Selling that might impact your Conversion Rate. This is a great area to focus on that has lots of leverage for very little cost.
Next up, I want to talk more about Marketing and the Sales Funnel.
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