It’s common for small and medium-sized businesses with limited resources to dabble in as many campaigns as possible, in short order, with hopes of generating massive volumes of leads and leaning on nurture campaigns to sort out the most viable prospects. This traditional approach to a sales and marketing funnel not only frazzles your marketing efforts, but the quality of leads coming into the sales organization will be all over the place in terms of quality.
A cluttered pipeline will hurt your overall SQL and won customer conversion rates because the number of leads coming in may give you a false sense of true MQLs. Worse, your sales team may not understand how to prioritize the volume of interested parties. By understanding your required funnel – in reverse – you are more capable of setting the right goals and KPIs across every stage of the sales process.
Why Use a Reverse Funnel?
The reverse funnel is a highly effective approach for businesses that sell high-ticket products or services that require a longer sales cycle, and need to calculate their quarterly or annual lead targets more strategically. The traditional funnel is then used to track and validate your calculations and assumptions.
Because the reverse funnel helps assign a precise number of leads required to meet your annual quota, vs a traditional funnel with a wider net, your sales and marketing team can leverage findings from the reverse funnel to target a smaller, more qualified group of leads -- defined by your total addressable market and ideal customer profiles -- who are more likely to convert.
Rather than launching many campaigns and hoping some of them are successful, you can focus on hyper-targeted demand generation strategies, earning higher-quality MQLs and then nurturing them through the funnel with personalized, relevant content.
How to Calculate the Reverse Funnel?
The reverse funnel means working backward from your desired financial goals to determine the necessary steps for achieving those goals. For instance, if your company aims to reach $150,000 in new monthly recurring revenue (MRR) by the end of the year, you need to figure out how many new customers you need to close to achieve this goal.
To do this, divide the company’s annual MRR goal by the product price point to determine how many new customers you need for the entire year. Then, you assess your sales team’s win rate and divide the goal by the win rate to determine how many sales-qualified leads (SQLs) you need.
Finally, divide the SQLs by the conversion rate from marketing qualified leads (MQLs) to SQLs to determine the number of MQLs your marketing team needs to generate.
Putting it into practice
For a goal of $150,000 in new monthly recurring revenue (MRR) by the year’s end, let’s start by reverse-engineering the funnel to understand what’s required from the sales and marketing teams to reach this golden number.
If your product’s price point is $1,500 a month, you’ll divide your company goal by the product price point to get the new sales you need for the entire year to achieve your goal.
To add $150,000 in new MRR, you need to close at least 100 new customers this year.
Next, determine your sales team’s win rate once they’ve received leads from your marketing team. How often does your sales team bring someone across the finish line? Is it 50% of the time? 25% of the time? 10% of the time?
For this example, let’s say your sales team closes 25% of all sales qualified leads (SQLs) in their pipeline. Divide the goal of 100 new customers by your average win rate:
This calculation shows that your sales team needs at least 400 new SQLs this year to generate 100 new customers to achieve your annual company goal.
Next, review past numbers to determine your average conversion rate from a marketing qualified lead – generated by marketing collateral like webpages, demand programs, and emails – to a sales qualified lead.
Let’s say it’s a 30% conversion rate.
If you divide the goal of 400 new SQLs by the conversion rate of MQL to SQL, you’ll see that your marketing team needs to generate roughly 1334 MQLs this year to fill the funnel in a sufficient way for your sales team.
This approach makes benchmarking quarter-over-quarter clear. By monitoring conversion rates between lifecycle stages, you know the pulse of business, identifying places to refine if benchmarketing goals aren’t keeping pace or where they are exceeding expectations, which can result in higher conversion rates and a shorter sales cycle.
Now flip your funnel over and you will see your "standard" sales funnel.
As you track your actual conversion rates month-over-month, you will see how close you are to obtaining your goal. This is a good time to give yourself a gut-check. Do your milestones need to be updated? Are your marketing campaigns underperforming? Is sales' close rate lower than expected?
Getting to the Gold
The first step is defining your revenue and understanding the number of leads required to hit your goal. If you’re looking for help to ideate, deploy and measure the tactics to reach your goal successfully, MTR can help!
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