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The Economics of a Sales Pipeline

It is not enough to understand the numbers in your sales pipeline (see “Mathematics of a Sales Pipeline”) you also need to understand the costs.

Let’s start with the example in the earlier article:

 by Helen Chapman

Over a year there were 1000 leads in this business, half of which were lost after the initial enquiry, a further 10% after the initial consultation, and only half the people that received a proposal became customers, just 20% of the original enquirers. The earlier article described how to interpret these numbers, but now we will focus on the costs.

In this example, the initial enquiry takes about 10 minutes to manage. A salesperson might manage four such enquiries on average per hour of their working week. If the salesperson is paid $60 per hour, the cost per enquiry is $15.

The initial consultation may take an hour with a further half hour of preparation and follow-up, that is a cost of $90. A quote may take two hours to prepare and an hour to present, that is a cost of $180.

Clearly, there is a significant escalation of costs as we move through the pipeline with the proposal stage costing more than 10 times the initial enquiry handling. This is why leads must be carefully screened for quality at the very first stage of the sale pipeline.

However, this still hides the true cost per sale as all the costs of the lost leads and prospects need to be included. For example, two proposals must be prepared to get one sale. The economics of this pipeline is presented below.

 by Helen Chapman

The total cost per sale in this example is $635 (the sum of the costs for each stage divided by 200 sales). I would hope the product they were selling was worth at least 10 times this amount! Note that the cost per lead (marketing costs), which are excluded from this analysis, would add to this total.
Often businesses don’t understand why they aren’t making money. It’s the hidden costs such as those in this example that can cripple a business.

So where should this business focus first? The most expensive part of the pipeline is the final stage. Are unqualified prospects being presented proposals just to keep the sales staff busy? This could be where the business could improve. If they were able to reduce the number of proposals presented by 30% by screening unqualified prospects at enquiry stage, the cost of the pipeline would be reduced by $36,000. This would also increase the conversion rate at the final stage to 74% and reduce the overall cost per sale to $457 or by 28%.

The next step would be to focus on the second highest sales cost stage, which would be the initial consultation stage, which may drop out further unqualified prospects, but is likely to also increase the final conversion rate

This process can be continued for each of your sales pipeline stages until your sales results are optimized. At which point you would return to improve your lead generation strategy, to increase the number of leads as well as their quality. This is a never ending process, but it is one that will transform your business.

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Dr Greg Chapman – The Profit Whisperer

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 by Helen Chapman
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 by Helen Chapman