Wednesday, February 22, 2017

79. SALES FUNNEL ANALYSIS

OBJECTIVE

Improve the conversion of prospective customers buy optimizing the sales funnel.


DESCRIPTION

Models that estimate demand usually focus on a specific aspect of the sales channel. For example, a pricing model usually defines the choice of customers in front of a set of possible products or services; however, it does not take into consideration the awareness of a product in the market (it usually assumes full awareness to simplify the analysis).

Ideally, these pricing models (see PRICING AND DEMAND models) have to be included in a broader framework called the sales funnel. A sales funnel consists of four main elements:
  • -          Market: the total number of potential customers;
  • -          Awareness: the people in the market who know the product;
  • -      Consideration: the people who know the product and take it into consideration for purchasing;
  • -          Conversion: of the people who consider the product, those who actually buy it.

These elements are related to each other, for example:
  • -          70% of people in the market are aware of the product (market awareness);
  • -          80% of people who are aware of the product consider purchasing it;
  • -          10% of people considering it actually purchase it.

Sales Funnel Analysis - Market, Awareness, Consideration, Conversion

Sales Funnel

We can calculate that 56% of all potential customers know the product (70% * 80%) and that 5.6% buy the product (70% * 80% * 10%). We also can calculate that 8% of people who know the product will buy it (5.6% / 70%).

An increase in the number of people in the market will result in an increase in purchases, since (usually) we assume that the relationships or ratios remain the same: 70%, 80%, and 10%. Data on market changes can be derived from public population data. For example, if our potential clients are males with an annual income between €40,000 and €80,000 and this sector of the population increases, then our “market” increases.

Besides the market, we can act on the relationships between market awareness, awareness consideration, and consideration conversion to increase the sales.


Market Awareness

In our example 70% of people know our product, but we can increase this ratio by investing in advertising, public relations, special offers, and so on. The effect on sales of an increase in people’s awareness can be calculated using the other ratios, which we assume do not change (80% awareness consideration and 10% consideration conversion). However, we have to consider that this assumption may not be completely true and either use corrective measures or just be cautious in interpreting the results. In fact, the remaining 30% of the people in the market who do not know the product may have lower consideration and conversion ratios, for example because they are more loyal to a specific brand and they do not know us or because they are not interested in looking for an alternative product. In this case, even if we make them aware of our product, it is probable that the awareness consideration ratio of these people will be far lower than our 80%.


Awareness Consideration

Out of the people who know our product, some of them will not consider it for a purchase either because they are loyal to a brand or because they think that our quality and/or price levels are not acceptable. There are two main ways to improve consideration:
  • -    If the price or quality are good but the low consideration is due to people having a worse perception than the reality, we should invest in communication;
  • -   If people have a correct perception of the price and quality, we can improve them (higher quality and lower price).

Investing in communication will improve the number of aware people who consider our product, and we can calculate the increase in sales using the consideration conversion ratio of 10%. We assume that the conversion ratio does not change, but, as in the abovementioned example, this assumption may not be completely accurate.

If we improve the quality or lower the price, it is probable that the consideration conversion rate will also change, since the product is more attractive to those people who have already considered it.


Consideration Conversion

In this case price and quality are the main drivers, but here they are compared with other alternatives (this is a similar concept to the reference price vs maximum price explained in the introduction to PRICING AND DEMAND models). The effect of a price modification can be derived from several pricing and elasticity models.


Optimization

With the proposed model, we calculate the impact on volume, more specifically the number of additional customers, but we should include other elements to decide which strategy to pursue:
  • -      Revenues: revenues depend on the average number of purchases and on the average price. Take into consideration that if we lower the price we may also have a positive effect on the number of purchases (depending on the product) but there will also be a negative effect since we are selling cheaper;
  • -      Costs: the costs of advertising, communications, and quality improvements have to be included in the model.

Once we have defined the structure of the costs and revenues associated with the model, we can use Excel Solver to find the optimal investment plan (see 80. OPTIMIZATION).



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