What is a Marketing Funnel?
Some people call it a marketing funnel, others call it a sales funnel. So what is the difference? Simply, if you are only tracking marketing’s responsibility to pipeline generation and revenue then it is a marketing funnel. If you are tracking the entire company’s funnel performance then it is a sales funnel. The fact of the matter is you can do both by creating multiple funnels. At the end of the day, both sales and marketing are responsible for driving revenue and should work together to achieve the company’s desired goals.
A marketing funnel is a structure for calculating the required marketing metrics (leads, MQLs, SQLs, pipeline) needed to meet key business performance indicators (KPIs) such as sales, ROI, and LTV. Once these metrics have been established you can combine them with a cost per outcome (such as cost per lead) to determine the required demand generation budget to achieve the stated goals.
The key metrics you should know when building your marketing funnel include; your revenue goal and the conversion rates between each stage of the funnel. Conversion rates will determine whether your funnel will need to be wider at the top (low conversion) or wider at the bottom (high conversion). Ultimately, you want the funnel as wide as possible as you move toward the bottom (a more cylinder shape would be best). This will require less lead generation, and ultimately a smaller budget, resulting in higher ROI on your marketing and profit for the company.
Although almost all B2B companies require a funnel to be constructed for determining metrics, some argue that a marketing funnel is less effective for setting and tracking B2C marketing metrics if the product has a short, uncomplicated decision cycle. For example, if you are marketing candy bars, then the marketing motion is primarily awareness and perception building. In this scenario the buying decision typically does not involve anyone from your company getting involved in the sale, especially if you are selling through an indirect model. Conversely, if the decision process is longer and more complicated, such as buying a new car or solar panels for your house, B2C companies should calculate the relevant funnel metrics to ensure they achieve their goals.
If you have multiple products or services, you might need to create a funnel for each of them. Different products or services have unique sales velocities, price points, conversion rates, and growth goals. You can create a master funnel to determine the performance of the entire company by consolidating the metrics from each of these product/service funnels.
What Do I Need to Get Started?
A goal. Without a goal, the undertaking of creating a funnel is fruitless. Depending on how deep you are measuring into the funnel, it could go as deep as calculating a lifetime value goal or as simple as a pipeline goal. Determining funnel metrics comes down to what you can measure and how you measure it. For a B2B marketing organization or a B2C company with complex sales below is a recommended minimalist structure
Below is a best practice detailed funnel for a complex, long cycle sale:
• Impressions (awareness)
• Contacts (database building)
• Leads (interest)
• Marketing qualified leads (MQL - meets marketing qualification criteria)
• Sales qualified leads (SQL - meets sales qualification criteria)
• Opportunities (positive engagement with the buyer)
• Pipeline stages (stages of the selling process)
• Number of deals (transactions, purchases, etc.)
• Sales (revenue, bookings, ARR, etc.)
• Lifetime value (revenue + referrals, retention rates, add-on sales)
• Profit (business value based on applying margin rate)
To get started you need to know what your revenue or pipeline goal is for the company, product, or service that you are building the funnel for. If you do not know how much pipeline or revenue you are targeting then it will be difficult
to determine the top of the funnel metrics such as leads. Next, you need to understand the historical conversion rates between each stage of the funnel. This will allow you to back solve your top-of-the-funnel metrics working up from revenue or pipeline goals.
Most marketers look to improve their conversion rates on a regular basis. If this is the case, you should update the funnel with improved conversion percentages. Remember, even small changes in conversion rates will dramatically impact the top-of-the-funnel metrics you need to achieve your goal.
Lastly, you need to know your average deal/transaction/purchase size. If you don’t know this number, ask your CFO or head of sales. Average deal size will help you understand how many deals you will need in order to achieve your revenue goal.
To illustrate how to build out a funnel, we will use a basic example highlighting the required steps.
Step One: Determine Your Base Metric
Every marketing funnel begins with a base or target marketing goal. In the example below, we are going to use the amount of marketing sourced revenue as the key metric. In this case, our marketing sourced revenue target is $10,000,000.
Step Two: Determine Your Funnel Stage Conversion Rates
In the example below, we have included two conversion rates: 1) from leads to opportunities (5%) and 2) from opportunities to deals (25%). Hopefully, you have historical data that can help you determine the conversion rate. If not, you can use standard industry conversion rates.
Step Three: Enter Your Average Deal/Transaction/Purchase Size
In the example below, the average deal size is $10,000. With the combination of your revenue target, conversion rates, and average deal size, you can now backsolve your lead and opportunity generation metrics. You can also determine the amount of pipeline you will need in order to hit your revenue goal.
Step Four: Determine the Budget You Need to Achieve Your Goal
Now that you know the number of leads you need to achieve your revenue goal, you can finally calculate the amount of budget needed to hit your KPIs. Take the number of leads and multiply it by your average cost per lead and you will get your budget number. In this case, we calculated a need for 80,000 leads with a cost per lead of $16.00.
The required budget comes out to $1,280,000 to achieve the $10M revenue target. With the percentage of budget coming out to almost 13%, it may seem like a lot, but it isn’t. You should build your budget using these metrics for a more accurate read on what you will need instead of using industry benchmarks. All companies are different, so tailoring your budget to your unique needs is critical. If you can’t get the budget number you calculated, then you will need to look at ways of bringing down your average cost per lead using free marketing channels or drive up your conversion rates with better messaging or offers.
A More Complex Example Featuring LTV
The example below shows what a funnel would look like with additional funnel stages. One critical metric that few marketers measure, but should, is lifetime value (LTV). This is easy to calculate if you know what your customer is worth over time. If you aren’t aware of this metric, your finance team should have this number. Just about all businesses have repeat purchases, add-on sales, customer referrals, or subscriptions that increase the value of a customer over time. If you notice on the chart below, LTV is the largest number by a lot and is the TRUE value that marketing creates. The best part is, if you present LTV as your north star metric at executive team and board meetings you will be seen as a strategic business partner. If the LTV is high enough it should lead to you receiving more marketing budget to drive the business.
Ultimately, the marketing funnel is a visualization for understanding the process of turning leads into customers. The goal is to nurture prospects through the buying process until a transaction occurs. Understanding your funnel metrics can provide a guide for building a goals-based marketing plan. The key is to measure your performance against the calculated funnel metrics throughout the year to ensure you are on the right track, and to adjust your marketing if it is off the rails.
For an easy and efficient way to calculate your marketing metrics and determine your budget automatically, get started with Plannuh’s FREE Operational Marketing Funnel Builder.
Plannuh, the first cloud-based Operational Marketing platform, makes it quick and easy to build, track, and recalibrate marketing plans. Unlike disconnected, static spreadsheets and disparate tactical marketing systems, only Plannuhoffers a unified, collaborative platform that delivers AI-driven recommendations, benchmarks, and process automation. The result is that marketers can align teams, optimize budgetary spend, and determine the ROI of their marketing. Interested in learning more? Book a demo today.