In praise of funnel metrics

It’s rare to get more than 20 minutes into a conversation about scale-ups before someone mentions ‘go-to-market (GTM) strategy’. The term has been around since the nineties but over the last three years it’s become ubiquitous and, as with all sexy concepts, generated an entire encyclopaedia’s worth of complex thinking and jargon of its own. Often, this comes at the cost of a primary focus on facts which, in sales, means simple funnel metrics.

Going to market

GTM means different things to different people, but to my mind the clearest, and simplest, definition is that GTM describes the whole journey of how you get your product into the hands of your customers. This is, of course, a vital analysis for all companies. Pre-revenue start-up founders in particular need to be putting it right at the top of their thinking.

The problem is that scaling tech companies (with £1-10m in revenue) are seeing ’sales experts’ pivot to become GTM Specialists.  The term’s all-encompassing nature means that any GTM consulting project needs to cover every element of accompanying jargon – usually with that expert’s own, bespoke GTM diagram think Conjoined Triangles of Success (if you know you know).

Off the top of my head, here’s a quick brain-dump of some favoured GTM terms: ICP, feature-benefit, core strengths, value propositions, channels, customer journey, segmentation, growth drivers, brand positioning, PMF, value matrix, PLG….

I could go on, but I’m exhausted thinking about it. You’ll often find funnel metrics tucked into these frameworks somewhere, but more usually nearer to the end of the process than the start, and often dismissed quickly in favour of twenty questions on market positioning and value propositions.

In praise of the funnel (and why it gets blocked off)

Don’t get me wrong – when it comes down to it, none of this GTM feast is wasted thinking. But its complexity regularly distracts from the most powerful tool in sales leadership: the funnel. Simply put, it describes what goes in, what happens in the mixer, and what comes out at the end. Speedy referral to the funnel can tell you more in an hour about your company’s ability to sell, and where to look for the problems, than three months of strategic GTM workshopping.

It’s true that the funnel doesn’t give you all the answers – but it does supply the questions and a very good indication of where to look. If done well, it also gives you the information you need to plan for the future, understand who and how many people you should hire and the potential impact of improving each aspect of the GTM Strategy.

So why don’t leaders prioritise funnel metrics in the way they used to? I’ve spoken about the subject at great length with Calculus Capital Partner, Richard Moore. He offered the following explanation:

“People don’t want to look at the reality of what the funnel is telling them.”

Richard Moore

This hit me like a brick. I’ve seen it with my own eyes. By focusing on everything but the numbers we can kid ourselves: ’The new branding strategy will change the company’s fortunes’, or ‘Adding more sales managers will help us finally hit our targets’. Often, what the numbers tell us is scary – it’s much more attractive to brainstorm a new set of slogans than engage with them.  

Here are some of the excuses I regularly hear: ‘We only sign enterprise clients, so funnel metrics are too simple for us’, ’We only sign one or two logos per month’, ‘Our sales process is complex, with multiple stakeholders, so funnel metrics don’t work for us’. Sure. The real story is that, as often as not, funnel metrics tell a story the leadership doesn’t want to hear.

How to use the funnel

To reiterate, I don’t think looking at the GTM strategy is a pointless exercise. Quite the opposite! My point is simply that for a scaling company, it’s the wrong place to start. Think about a doctor who searches for a cure without a clear understanding of the diagnosis.

While most people reading this will understand the specifics of what I mean when I talk about funnel metrics, those who don’t may be looking for a bit more clarity (thanks for bearing with me to this point). I hope the following might help, and if you’d like a copy of this simple spreadsheet feel free to reach out – you can find my email address at the bottom of the blog.

Let’s take a basic SaaS company and look at a typical sales funnel. I’ve simplified it – your funnel will need to reflect the movement of leads through your company. How exactly you do it is less important than staying consistent and making sure that each stage can be easily measured (unlike one company, which told me they had three definitions of ’deal’).

All companies will need to start by asking a set of similar questions:

• How many marketing qualified leads (MQLs) are you adding each month?
• What are your conversion rates through each stage (MQL to sales qualified lead (SQL), SQL to contracting, contracting to deal)?
• How long does it take for a lead to pass through each stage on average?

It’s likely you may have more stages (people often track leads, but for brevity I’ve kept it simple), or different stages, but the simpler you can keep it the better. No prizes for the 12-stage funnel (I’ve seen it).

Let’s put together a table around the assumption of roughly 200MQLs per month, with accompanying assumed conversion rate and timespan.

Now, let’s apply that to the funnel metrics.

Quick run through of the logic… The yellow the numbers are actuals, so:

• If we take the MQLs from four months ago at an average 20% conversion rate we’d expect 175 leads to convert in two months to c.35 SQLs (at month -2 we can see that it’s 37).
• The 37 leads should then convert at 15% in two months to 5.3 contracting leads (at month 0 we can see it’s 6)
• Finally those 6 leads should convert in one month at 50% to 3 sales which is what we’re forecasting next month.

If you’re interested in what average conversion rates are I’ve put some links to excellent third-party blogs in the accompanying spreadsheet.

This quick table reveals a wealth of information. We know that due to the drop in leads two months ago we’re likely to get fewer SQLs, fewer deals into contracting and, ultimately, in three months’ time we are only forecasting one new deal rather than the rough average of three.

From here we can start to identify what’s gone wrong and how we might need to fix it. Perhaps the dip was seasonal, or maybe something went wrong in the marketing. Too often, the gut reaction to a drop in sales is that we need to train the salespeople better. But from this analysis, we can see the issue was a marketing problem, not a sales problem, so training new salespeople – or replacing the team – is unlikely to solve the issue.

Let’s take a different issue.  Say you started to notice that the conversion rate from contracting to sold moved from 50% to 30%. This should prompt a close examination of the interactions with procurement departments, instead of a wholesale reidentification of your intended customer profile (ICP).

Perhaps the most common issue I see with scaling companies is that they focus too hard on the end of the funnel. If sales don’t come through, it’s the fault of the salesperson – instead of a lack of leads coming through at the top. Too often, businesses change personnel around at the bottom of the funnel without giving salespeople the ingredients they need for success: qualified leads they can sell the product on. Without the whole picture salespeople are chopped and changed, or unnecessary new hires are made in a bid to amp up sales. But with no understanding of the funnel this tends to fail.

The example above illustrates another important point Richard makes about why CEOs so often ignore funnel metrics:

’Although the logic of the funnel is simple, the implied number of MQLs can be intimidating.’ 

Richard Moore

What does this mean? Given the conversion rates above, the company needs 67 MQLs for each new logo (1 divided by 50%; divided by 15%; divided by 20%).  If the average ARR per new logo is £30k and the new logo sales target for next year is £1.5m, the Company needs 50 new logo wins. Based on the maths, it takes 3,350 MQLs to generate 50 new logo wins.  If the conversion rate from contracting to sold does drop to 30%, the number of required MQLs goes up to 5,550.  That is a lot of MQLs! Instead, a founder might find it easier to conclude that their business is different, ‘and these tiresome funnel metrics don’t really apply…’

As investors, it’s our responsibility to work with our partner companies to ensure they engage with the problem – and solve it. It falls to founders, meanwhile, to be brave, refuse to bury their heads in the sand and instead engage with the funnel, and leverage it to drive growth – no matter how hard.

Using the funnel for hiring and more

In the next stage of the funnel, it’s time to start putting values against these logos. It can be tempting here to track a weighted pipeline. Now, at the risk of stoking further controversy, I hate a weighted pipeline. This percentage is rarely based on any evidence, but it helps a company offer the impression that big sales are just around the corner. It’s much better to forecast what’s coming out of the end of the funnel and then multiply that by the ACV. I’m sure some will disagree, but I’ve never seen a weighted pipeline that was any use.

If the company in our example had an ACV of £30,000, and was closing three deals per month, this would give it sales of c.£1.1m a year. There are plenty of performance metrics around salesperson quotas but generally it’s around £500k per year. So, for this company, that’s two salespeople. The funnel offers a meaningful insight into the hiring needs of the business: there’s no point adding any more salespeople until the top end of the funnel starts delivering more MQLs.

To make it clear, one last time, I’m not calling for the abolition of GTM Strategy. What I’m saying is that companies could do themselves a lot of favours by paying much closer attention to good old funnel metrics – no matter what the story is beneath them – and less time in management offsites, working out how to reposition the brand. I’d love to hear your thoughts on this and, as I wrote, I’d be happy to share the spreadsheet above. If you’re a funnel-metrics-adept and you want to show me the amazing company you’ve used them to build, then get in touch. You can reach me on – [email protected].