October 28, 2005

Funnel Economics- an Introduction

Posted in management, marketing, Sales at 3:24 pm by scottmaxwell

Even with all my ranting in board meetings about the topic, I continue to be amazed by the lack of focus on the economic aspects of the sales and marketing funnel (A.K.A. Funnel Economics).

Funnel Economics is essentially how much money do you spend on the funnel (in the form of sales and marketing expenses) vs. how much money (in the form of Gross Profit) drops out of the funnel? In this sense, Sales and Marketing is a money machine (remember that magic trick where you put a dollar in, turned the handle, and you got $10 out?) when done right (and a money sink when done poorly). Somewhat more complex issues include:

  1. What are each of the components of the funnel and how do they contribute to the economic results?
  2. How have your Funnel Economics changed over time?
  3. What are the marginal Funnel Economics?
  4. And, most important, How can you maximize the Funnel Economics? (this is actually the most important question, but you need the answers to the other issues to accurately address this one.)

My argument for putting more energy against understanding and improving the Funnel Economics is that it is the most important (and complex) factor in determining the growth, profitability, and, indirectly, ultimate valuation of an emerging growth technology company (yes, the product, pricing and services are really important too, but they factor into the funnel economics…more on this below. And, yes, many companies get acquired for their technology, before they get a chance to scale up their funnels, but this is the Expansion Stage view).

When to focus on Funnel Economics

In the early stages of a company’s life, the processes should be creative in nature and informal (this also involves very few high quality highly passionate people trying a huge number of things before settling in on “what works?…probably where a lot of the “magic? takes place). Forget about funnel economics at this stage, as you should be making something and getting some people to use it! Most important at this stage is moving down the sales learning curve as far as possible (although you will need some simple form of Funnel Economs to understand how far down the curve you are.)

As a company finds its footing and is ready to scale up its sales and marketing resources (the Expansion Stage), measuring and managing the funnel economics are a extremely important activity (you are about to amplify them, possibly significantly, so you had better be able to predict the results accurately).

It’s all about Sales and Marketing Management

Many Factors Extenal to Sales and Marketing Influence Funnel Economics…

Market and product factors are highly important in determining the order of magnitude of funnel economics. For example, a high growth market with an extreme pain point where the company has the best solution, a natural ability to have a network effect and the ability create a viral effect would probably have pretty rich funnel economics (add any Web 2.0 concepts that I am missing, as the web 2.0 crowd has done a great job of clustering important concepts and giving them a tag that generally represents many good principals).

…But Sales and Marketing management AND the company CEO can have a tremendous effect!

From a sales and marketing management perspective, however, most of the market and product factors are fixed, at least in the near term. The key is to understand how the sales and marketing activities influence the ultimate economics of the company (are you getting $1 for each dollar dropped in or $10?)…especially important are maintaining and improving them as the company grows!

I have seen many companies make significant progress understanding and managing their Funnel Economics (and many technology companies building products to help them with various aspects of the analysis). I have also seen many companies punt on these issues or not keep careful track of their development which has resulted in a lot of wasted capital!

Hopefully, all companies will adopt this approach and do it well…until then I will keep ranting…

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7 Comments »

  1. Hi Scott:

    This is an excellent post. I’m constantly amazed at how many entrepreneurs start new businesses, especially software businesses, without thinking much how their sales funnel will eventually work.

    In my opinion, this is the part of a business that is the least obvious and therefore most likely to fail in a new startup. If your product is buggy or your service is crap or you keep running out of cash, these problems will become unavoidably apparent. But if you don’t have your sales funnel working right, the only obvious symptom is anemic sales growth. It’s much harder to diagnose the source of this problem than the others.

    I’m just starting my fourth business now–we will launch in early 2006–but I think it is worth paying attention to the Funnel Economics even now. Sure, we will experiment a lot before we find the best formula for our business, but once our product is launched, our sales and marketing will become the most critical process in our business so I should really be preparing for it now.

  2. Hi Scott! Welcome to the blogoshpere and that’s one hell of a post! Maybe I can add some thoughts to it.

    The least interesting is that, yes, your cliched company founder doesn’t know how to sell. It sucks, but you do get a lot of very helpful startups out of it, who give away product and survive on Google advertising.

    The other thing is financial modeling – identifying, evaluating and selecting sales funnels is best done with the aid of pretty complex, glorified spreadsheets. I haven’t found the market leader in this space, but what you are talking about is homogeneous pain for a lot of people, so I’d love to hear of any body solving this problem properly.

    Thirdly, yes- it *would* rock if the Web 2.0 technologies, including tagging and social networking stated to penetrate further into how people market and sell things. Pretty much all the consumer focused start ups I’m seeing at the moment could apply themselves the enterprise market….and it’s surprising that they aren’t doing that. Oh well…give it year….I’d say the enormous amount of data getting churned out in the bid (and small) end of town is gonna start getting tagged, syndicated, blogged, wiki-ed and collaborated on (using anything BUT MS Offfice).

    Keep’em coming Scott!

  3. […] As I have been working on trying to frame out some of the strategies related to Funnel Economics over the last few years, my favorite is the strategy of companies putting much more energy into building better, simpler products (from the user perspective), charging less for them, and using very efficient sales and marketing approaches (rather than building an acceptable product and trying to have as high a price as possible through a value-based sale and aggressive sales and marketing efforts). […]

  4. technology said,

    godd job guys,thanks for share

  5. Quite a good post. I saw a site with a article almost identical to this one a couple of weeks ago. This post is a week older so I assume they have just copied and eddited it. I am not accusing you of plagiarism it’s merely just head’s up. I can’t recall the page, sorry (age thing)

  6. tramadol said,

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  7. […] “sales and marketing economics”, “distribution economics”, or “funnel economics“). Ideally, the management team has gone down the learning curve far enough that the benefits […]


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