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
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).
TEMPLATE
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