The Sales Funnel Explained
Have you ever heard about a sales funnel?
A sales funnel is a familiar buzzword used a lot during meetings, especially while planning, measuring or forecasting sales for a business.
Most often, the term ‘sales funnel’ is used interchangeably with a ‘sales pipeline’ – adding even more confusion behind its meaning and importance.
This leads to a lot of important questions, including:
“What exactly is a sales funnel and why does it matter?”
“Why is it called a funnel?”
“How is a funnel different from a sales pipeline?”
For those who’ve wondered about these questions before, but could never find clear answers, we’ve put together this guide to help you understand the concepts better.
Ready to dive deep? Let’s begin.
The Sales Funnel Explained With An Example
What if we tell you that you’ve been a part of a sales funnel, or seen one yourself in broad daylight, but haven’t recognized it?
Let’s try to understand this with a scenario.
Picture yourself commuting to work.
On your way, you spot a new billboard ad for Nike. The ad shows their new performance shoe for runners. Since you’re into running, the ad attracts your attention for a brief moment and then you decide to go on with your commute.
Later during the day while scrolling through social media, you see another ad for the new Nike shoe. This time, you take notice, click on the ad and visit the website. You gather some information, and form an early impression about the product.
Given your interest in athletic gear and sports in general, you think it’d be a good idea to stay in the loop for special news and offers, so you sign up with your email.
A few days later, while having a conversation with a coworker (who also shares an interest for running), the talk drifts to buying a new shoe. She asks for your suggestions and you recommend trying the new Nike shoe that you have been seeing across billboards and social media lately.
Eventually, you think of treating yourself.
So you decide to head to a store and see how the shoe looks and feels. Next thing you know, a savvy sales rep starts talking to you about the features of the new shoe and how it is designed for maximum performance for runners.
By the time the conversation ends, you’ve already decided that you want to buy it. The only problem is – the shoe will cost you more than what you can spend at that point in time.
So you decide to wait.
A few weeks later, you receive an email from Nike with an offer to avail a 10% discount code on their new shoe, a limited offer valid only for a day.
You get excited, and almost instantly, decide to shop. You put in the discount code and place the order.
So, what happened here?
The above example demonstrates how a typical funnel works in three major steps:
Step 1: Marketing ensures the target audience sees ads across social media, billboards, and other popular mediums. The goal is to grab maximum attention and generate interest towards a product or service through creative ways.
Step 2: This leads to generation of leads (or ‘inquiries’ from people who want to know more about your product or a service). Lead generation happens through email sign-ups, store visits, etc. and during this phase, leads are learning more about a product or a service.
Step 3: Ultimately, people who show a clear purchase interest, qualify as prospects. Post that, the sales team can start talking to these prospects to help them evaluate the product or service better and make an informed purchase decision.
Now, let’s look back at the example and try to analyze how the sales funnel worked there:
The shoe ad successfully generated interest among the target audience, and some of them decided to stop and take notice.
Next, the marketing folks decided to run the same ad across social media to generate more awareness and reach more people.
Once they generated enough leads with a purchase intent, they offered a limited period offer (a discount code) to nudge these people towards buying.
The brand or nature of business might change, but the psychology remains the same. The funnel view can be applied to every industry or business niche to understand and map the buyer journey better.
Example aside, let’s understand the sales funnel through a definition.
The Sales Funnel Demystified
A sales funnel is a step-by-step framework with which you can attract potential customers, familiarize them with your products or services, and finally, guide them towards making a purchase decision.
Visually, a sales funnel is like an inverted pyramid, broader on the top and narrower on the bottom.
- Top of the Funnel (TOFU) is where all visitors enter your sales funnel as leads.
- Middle of the Funnel (MOFU) is where you qualify some of the leads as prospects.
- Bottom of the Funnel (BOFU) is when you convert sales ready prospects into customers.
Not every lead that enters your funnel will convert into a customer, hence the funnel gets narrower at each stage.
Essentially, a sales funnel works like a well-defined journey map that your leads follow, right from the first time they respond to your efforts to the moment you convert them into buyers.
This journey can also be seen through a sales pipeline, but it’s a different framework altogether.
Let’s understand this difference in detail and see how each of them fits in with your sales strategy.
The Difference between a Sales Funnel and a Sales Pipeline
Firstly, what is a sales pipeline?
By definition, a sales pipeline is a number of steps or sequences that a sales team follows to turn prospects into customers.
The stages of a pipeline might vary according to your industry or business, but here are the most common ones:
- Sales Meeting
- Sales Proposal
- Closing the deal
Thus, a sales pipeline gives you an overall view about the steps you need to take, in order to complete the entire sales journey, i.e. from contacting a lead, to arranging a meeting and converting them into a customer.
A sales pipeline provides a high level view into your sales – it helps businesses keep a track by showing the overall volume and value of sales at each stage of the pipeline.
In other words, a pipeline enables businesses to organize, manage and forecast their sales.
How is a sales funnel different from a sales pipeline?
Ultimately, both pipeline and funnel represent the overall sales efficiency within a company, they just do it in different ways.
Here’s an easy way to understand and remember the difference between the two:
- A sales pipeline is how things should be moving. It communicates the overall quantity and quality of your sales efforts by giving you a count of effective sales volume at each stage.
- A sales funnel is how things are actually moving. It communicates the actual number of people who are moving further in their buying journey, by giving you the conversion rates/ratio at each stage.
A pipeline is like a macro view into your sales processes. If you want to know the stage where a particular lead or prospect is, and what steps you need to take next, a pipeline will help you.
A funnel is like a micro view into your sales processes. If you want to know how your leads are moving through different stages of their journey along with the conversion rates at each stage, a funnel will help you.
In case you’re wondering – yes, both pipeline and funnel views are important to look at if your goal is to measure and improve sales.
A sales pipeline will help you map your entire sales processes clearly, bring a level of organization to your activities plus, it will also help in improving the efficiency of your team.
A sales funnel gives you a closer, deeper look at your conversion numbers at different stages. And with these insights, you can easily fine tune your marketing and sales strategy to attract, engage and qualify more leads into customers.
Now that you know the difference, it’s time to understand the stages of a sales funnel better.
Read Part 2 of our guide to the sales funnel next (and understand how different stages fit together with your buyer’s journey).