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Peter Drucker’s measure of successful marketing is the point at which the act of selling becomes unnecessary. Some companies have reached the point where their product is so essential or desirable that no one needs to “sell” to their customers, or to consumers in general. They are already sold.
In most cases, however, a salesperson from your company or one of your partners is essential for answering questions, alleviating consumer fears, ensuring that your products advantages are understood, and closing the deal. This process can take a couple of minutes on a store floor, 15 minutes during a test drive, or, for more complex products and services, several months.
Regardless of the scenario, however, the role of marketing is the same: to generate demand for the organization’s products or services. It is essential for marketers to differentiate demand from awareness. As the name suggests, the goal of awareness is to make certain that prospective customers know about your product or company. Although under ideal circumstances awareness ultimately leads to a sale, by itself it does not compel customers take any specific action. In contrast, demand generation does mean compelling prospective customers to take action to achieve a desired outcome, whether visiting a store, calling a toll free number, or requesting additional product information. Some people go so far as to define marketing’s mission as making the phones ring.
In this chapter we discuss the process and terminology of demand generation. Specifically, we focus on strategies for transforming prospective customers — known in the trade as leads — into satisfied customers. We also examine the automated systems that modern marketers utilize to accomplish this goal. We begin by exploring the all-important concept of the funnel.
What Is the Funnel?
The funnel is a shorthand term for describing the route by which prospective customers, or prospects, become customers. The visualization of the process looks like a funnel. A larger number of prospects go in the top and are reduced to a smaller number of customers who come out the bottom.
Who came up with the funnel? Interestingly, the idea for the funnel visualization was a refinement of a previous visualization, also derived from a piece of kitchen equipment — the pot. In 1904, Frank Hutchinson Dukesmith, editor of Salesmanship magazine, created a mnemonic to help salespeople remember the critical stages of the sales cycle. The key stages were attention, interest, desire, and conviction. Dukesmith later changed conviction to action, and the popular sales mnemonic AIDA was born.
Dukesmith explained that the number of prospects decreased with each stage – more potential customers will be interested than will finally take action. He represented each stage as an iron pot, with the size of each pot diminishing from A to I to D to A. If you stacked the pots, with the smallest on the bottom and the others balanced on top, it resembled a funnel. 
Perhaps this is what inspired Arthur Peterson, a marketing and sales executive in the pharmaceutical industry. Nearly 50 years later, he connected the idea of a “customer funnel” with Dukesmith’s AIDA mnemonic in his book Pharmaceutical Selling, Detailing, and Sales Training: “The progression through the four primary steps in a sale, i.e., attention, interest, desire and action, may be compared to that of a substance moving through a funnel.” Rather than envisioning a separate pot for each stage, Peterson’s funnel was dissected horizontally into four sections: A-I-D-A. The concept has stuck. and nearly every sales executive learns it early on in his or her career. Peterson’s funnel is shown in Figure 1 below.
Figure 1: The original sales funnel, from a 1949 pharmaceutical sales manual
Although some marketers still use the AIDA system, the majority employ a more modern evolution of the funnel that involves five stages: awareness, research, consideration, purchase, and customer. We discuss this model below, and we illustrate it in Figure 2.
Awareness – As we previously explained, this is the process by which prospective buyers become aware of your brand, company, or product. Organizations can promote awareness through advertising, public relations, word of mouth, or other means. Recall that this process can occur long before the prospective buyer intends to make a purchase.
Research – Once prospective buyers intend to make a purchase, they enter the research stage. At this point they want to learn more about your product, particularly its features and its price, as well as similar products on the market. They can conduct this research in a number of ways – reading your web site, examining product reviews, talking to a friend or colleague, or seeking the opinion of an industry analyst.
Consideration – At this stage, buyers are choosing between the most likely purchases, having eliminated any products that did not meet their criteria. They may seek additional information, look to take a test drive, or witness a demonstration. They also might want to talk to existing customers.
Purchase – This is the point in the process when the prospective customer actually makes the purchase. At this point the prospective buyer transitions to a customer.
Customer – Even after a customer has made the purchase, they are still part of the funnel. Why? Happy customers – the Net Promoters we covered in Chapter 7 — will buy additional products, renew subscriptions, and recommend your products to other potential buyers who are in the research or consideration stage. Really happy customers even help at the awareness stage, talking up their new purchase and recommending it to friends and colleagues. From the opposite perspective, unhappy customers may malign your product, refuse to purchase any of your other products, and even defect to your competition.
The funnel is sometimes referred to in marketing departments as the customer journey. The length of the journey will depend on the type of product, how expensive it is, and whether it is a consumer product or one sold to businesses. For an inexpensive consumer product, this journey can occur in minutes. Consider, for example, a thirsty shopper who recognizes the logo of a popular soft drink on a refrigerated displace case (awareness); quickly scans the package, nutrition facts, and ingredients (research); compares it to the labels and prices of other drinks (consideration); buys it (purchase); and then tells her friend how good it tastes (net-promoting customer). In this example, Marketing has supplied everything the consumer needs to make an on-the-spot decision, including weeks or months of advertising that contributed to awareness.
For more expensive consumer goods, like cars, or complex business-to-business products, like software, the journey likely will take longer. Prospective buyers frequently search for specific information as they descend through the funnel. Marketing’s job is to ensure that the right information is available when prospective buyers need it, either by sending it directly to them or by providing it via the sales team. The best marketing teams use the funnel visualization to illustrate their customer’s journey, and work with Sales to determine what materials Marketing needs to create for prospects and salespeople at each stage.
Leads and Opportunities
A lead is the name and contact information of a potential buyer – someone who has the interest and authority to purchase a product or service Leads are the lifeblood of a sales organization, and providing leads to Sales is a vital function of the marketing organization.
In previous chapters, we have used the term ‘lead’ fairly loosely, but marketers employ specific terms to describe the “state” of the lead. As a lead progresses down the funnel, it becomes more “qualified,” meaning there is a higher likelihood of a purchase. Sales and Marketing need to understand the number of leads in each state to know whether they will reach their ultimate revenue target.
Importantly, both Sales and Marketing are part of the sales process. The degree to which each is involved depends on the type of sale and the organization. In our soft drink example above, Marketing was responsible for the awareness, research and consideration stages ,through advertising, display, packaging, pricing and research that went into the product itself.
Generally speaking, in B2B sales, the marketing organization is responsible for a lead through the awareness and research stages of the funnel. A lead at this stage may not be ready to speak to a salesperson, or they may not be qualified enough to warrant a salesperson spending their time working on it. B2B sales organizations will certainly get involved during the consideration and purchase phases, and may be involved with a leads during the research stage. Since there is variability depending on their business, organizations need an agreed-upon process by which Marketing turns over the customer to the sales team. This is known as the handoff. Leads can be emailed, uploaded, or their status can be changed in an organization is using a marketing automation system, which we discuss later in the chapter. In the case of some consumer goods, there may be a handoff at the point at which a prospective customer calls, emails, or walks into the store in response to a marketing offer.
But one question remains: How can a marketing team track what stage a lead is in? Most customers don’t think of what they are doing the same way a sales and marketing team do. This is why Marketing and Sales need to track the state of the lead. The lead state describes its status in terms of fit with the desired buyer profile and activity of that lead. Below are the definitions of the states of a lead, and Figure 3 illustrates a view of the funnel based on lead state.
Name – As its generic nature suggests, this is just a name on a list or in a database. At this point, marketing has performed little, if any qualification, except perhaps that the person matches the desired demographic or buyer profile.
Inquiry –At this stage, a prospective customer has responded to a marketing offer. He or she has expressed some level of interest in your product or service.
Marketing-qualified Lead (MQL) – An MQL is a lead that Marketing has qualified to some level and is ready to turn over to Sales. The qualification process will vary from company to company, but it typically comprises a combination of profile (demographics, role) and activity (inquiry). For example, a software company may decide an MQL is a director level person who works in the information technology department at company of over 1000 employees, who has viewed an online demo of their product.
Sales-Accepted Lead (SAL) –At the SAL stage, Sales acknowledges that an MQL meets the agreed-upon criteria and agrees to work with this individual. Just as the criteria being met are important to Sales, an agreement to follow up within a proscribed timeframe is important to Marketing so that a qualified lead does not “go cold.”
Sales-Qualified Lead (SQL) – An SQL involves a decision by Sales, after additional qualification via discussions with the potential buyer, that there is a sales opportunity with a timeframe and a budget. Leads at this point are commonly converted to opportunities. Leads that are not converted should be sent back to Marketing, preferably with some explanation as to why they did not make it to the opportunity stage.
Customer – Once a deal is closed, the lead has become closed business, better known as a customer. Existing customers can, of course, become leads again for the purchase of additional products or services.
You may hear a few other terms used to describe leads. One such term — raw lead — is not well defined. As its name suggests, it refers to a lead that has not been qualified. It may be either a name or an inquiry. Suspects are names that fit the profile but have neither inquired about your product or service nor been further qualified. Attendees at a trade show who buy products like yours are suspects. Finally, a prospect is somewhere between a marketing-qualified lead (MQL) and a sales-accepted lead (SAL). Disagreements as to whether the leads that Marketing hands over to Sales tend to be good or bad prospects are frequently the cause of friction between the departments.
Two additional terms that salespeople typically use are pipeline and forecast. A pipeline is the collection of opportunities, typically expressed in dollars by multiplying the number of opportunities by the average expected sales price. A forecast is the subset of opportunities that the sales rep expects to close within a given time period. When a sales leader says his pipeline is low, the marketing team should think about how to increase the number of MQLs. If the forecast is low and the pipeline is okay, it may point to a product or sales effectiveness issue. In other words, sales is talking to enough qualified leads, but something else is causing those opportunities to fall through.
Lastly, consider using the two views of the funnel in your demand generation efforts. The customer journey view is most useful in planning what types of customer collateral and sales training a marketing team needs to produce to move prospects to customers. The demand generation view helps sales and marketing teams communicate specifically about the state of their demand generation efforts, and ultimately the health of their business. To align the two, marketers need to know their customers and sales process well.
Calculating the Number of Leads You Need
To effectively drive demand for a business, the marketing organization must have a concrete target number of leads in each state. The easiest way to calculate these numbers is to start with your revenue target and then work backwards up the funnel. Using known or estimated conversion rates and the average sale size, you will reverse-calculate how many SALs and SQLs you need to produce the required number of customers. Likewise, you will calculate how many MQLs you need to generate the required number of SQLs, and how many inquiries you need to produce your target number of MQLs.
There is an additional important consideration. Make certain you understand how much new revenue Marketing is responsible for generating. Marketing is often not responsible for generating 100% of qualified leads. For example, if an organization’s revenue includes recurring annual fees, such as support and maintenance for software or subscription renewals for telecommunications services, then Sales or Customer Service may be responsible for handling and they probably will not require marketing assistance (unless there is an attrition problem, in which case a marketing program aimed at retention will be needed). If you work with a dedicated direct sales force, Sales management typically will assume responsibility for generating 15% to 50% of the pipeline These leads are sometimes referred to as sales generated leads, or SGLs. This pipeline comes from repeat business from existing customers, pipeline carried over from previous quarters, or a desire on the part of sales leadership to make their salespeople prospect for new business. If you don’t have a dedicated sales force, then you may be expected to generate 100% of the pipeline.
After you have established your revenue target and percent of qualified leads Marketing needs to generate, you can start your calculations. If you do not have historical conversion data to rely on, you can obtain conversion rates from a number of marketing research firms, including Sirius Decisions and Forrester Research.
Let’s say you have a new revenue target of $10 million. Sales will take responsibility for half of this amount from the existing pipeline and by prospecting from their own contacts. So, Marketing needs to generate the other half, or $5 million. To keep the math simple, our product will sell for the non-negotiable price of $100,000. Figure 2 illustrates our process. We’ve flipped the funnel upside down to emphasize the reverse process we use.
- Step 1: We start with our target of $5 million.
- Step 2: We divide this total by the price of an individual product ($100,000) to determine the number of customers we need. 5,000,000/100,000 = 50 closed opportunities.
- Step 3: We calculate the total number of opportunities, or SQLs, we need to generate 50 closed opportunities. Our reps believe they can close 1 out of every 3 deals. Thus, 50*3 = 150 SQLs.
- Step 4: We calculate the number of MQLs needed to provide Sales with 150 SQLs. Having worked with this team for a while, we know that Sales accepts all of our MQLs. So the number of SALs and MQLs will be the same. We also know that Sales qualifies approximately 3 in every 4 MQLs (75%). 150/0.75 = 200. So, we need 200 MQLs to generate 150 SQLs.
- Step 5: We have to determine how many inquiries we need to produce 200 MQLs. We know that about 50% of our inquiries convert to MQLs. 200/0.50 = 400. So, we need 400 inquiries.
- Step 6: Our final step – and potentially the most discouraging – is to factor in the response rate for direct email. In our case this rate is 2%. 400/0.02 = 20,000. Thus, to obtain 400 inquiries, we need 20,000 names.
The best sources for data on conversion percentages are your experience, your sales team, and firms that track these statistics by surveying sales and marketing teams, such as Sirius Decisions and Marketing Sherpa. Your sales price should be your average sales price – reflecting typical discounts, not your suggested list price. When in doubt, be conservative by picking lower conversion rates. Keep in mind that conversion rates are usually much higher for existing customers, so treat them well and market new products to them whenever you can. If your CFO wants to know why Marketing needs so much money, show him or her the funnel, and explain the costs associated with buying or acquiring 20,000 names.
Finally, make certain you have enough opportunities to achieve your revenue number. Marketers refer to the required ratio of opportunities to target revenue as pipeline coverage. A coverage ratio of 3:1 is typical (this is why we multiplied closed opportunities by three in Step 3 above) . Consequently, when you run a “pipeline coverage report,” which you should pull from your marketing automation system on a regular basis, a ratio of 2:1 would not provide sufficient coverage to achieve your number, whereas 4:1 would provide more than you need. When the coverage is too low, you should invest additional money to raise the number until you achieve your target. Conversely, when the coverage is too high, then you should consider allocating a greater share of your budget to other marketing activities. Another option is to raise your revenue forecast.
Lead scoring is a technique for quantifying the value of a lead based on profile and activity. Points are given to leads based on certain attributes of their profile and activities they engage in. The total of these points in the score.
The purpose of lead scoring is to segment leads based on a score and then pass over only truly qualified leads to the sales team. In a manner of speaking, lead scoring takes the qualitative out of lead qualification and replaces it with a quantitative measure. Not only does lead scoring make automation possible, it also makes the process more effective, and should boost the number of MQLs that become SALs.
The profile attributes used in lead scoring include the prospect’s name, title, company, location, and similar data. This information can be supplemented with data concerning the prospect’s budget, purchase authority, and purchase timeline, if collected. Activity takes into account both online and offline activities, such as seminar attendance, website visits, and views of marketing assets. A marketing team might decide to give attendees of a seminar more points than attendees of a webinar, for example, since taking the time to travel to a seminar, park and sit through the presentation demonstrate more interest and purchase intent.
Most marketers perform lead scoring using a marketing automation system (We discuss automation software later in the chapter.). Each of these will have its own, proprietary method for implementing lead scoring – there is no universal scale used. So there is no absolute score that at which lead state changes from Inquiry to MQL. It is the relative score, not the absolute score, that is important. What score must a lead achieve to be worth handing over to Sales? The answer varies and is determined by two factors: (1) your business, and (2) the handoff negotiated between Sales and Marketing.
Putting lead scoring in place requires trial and error. Companies start with some assumptions concerning the target buyer profile, based on the target market and persona, and then they try to map the customer journey and associated activities to lead states. So, for example, a lead that is a good profile fit, has downloaded a few white papers (likely researching your product), and has examined pricing information (to determine whether he or she should consider your product), will probably accrue a lot of points, achieve a high score and get passed along as an MQL. In contrast, is a lead that is an average profile fit but has proceeded directly to a free download of your product either is in the consideration stage or is just a hobbyist with no real need or budget? Understanding these patterns and tweaking the scoring calculation to better map to your ideal lead can take time. Figure 5 below is an example of lead scoring where both profile and activity scores have thresholds for sales handoff. In this example, Sales will only accept leads with activity and profile scores over 26, and prefers leads with profile scores over 50, which are the ‘A’ leads.
Just because a lead has a low score does not mean that it should be thrown away. Perhaps the prospective buyer’s budget was taken away, but he or she will be back next year when a new budget is created. Or, perhaps an event in the consumer’s personal life has made it impossible to purchase that new flat-screen television. If conditions improve and these leads return, you can continue scoring and then pass them on to Sales when they are ready.
From the opposite perspective, you can downgrade a score over time. Maybe you find out that certain leads inflated their title, are perennial tire kickers, have published negative comments about your product in online forums, or any other number of factors. You should reduce their scores accordingly.
So what happens when a prospective buyer fits the profile and has expressed some interest, but is not ready to buy? Maybe they made an inquiry or two, looked at some of your collateral, but don’t have the money or budget to make the purchase, and are not sure when they will. If you are using lead scoring, perhaps the score did not meet the MQL handoff threshold. Or, maybe sales accepted the lead, but when they qualified further and realized the buyer was not ready, did not convert to an SQL.
Since you have already paid money for the lead – the total cost of acquiring the name, any asset printing and mailing costs, and the time of your telemarketer and salesperson – doing nothing would be a waste. Yet many companies do just this. They go out and buy a whole new set of names and start the process all over again. This approach is both inefficient and very expensive.
This is where lead nurturing comes in. Lead nurturing, which we touched on briefly in the last chapter, is a systematic process for moving leads to the next state. Nurturing is typically aimed at moving names or one-time inquirers to the MQL stage, but can also be used to drive interest in additional purchases with your installed base of customers.
What distinguishes nurturing from other marketing programs is that it is sustained. Nurturing has been around for decades in an informal fashion. Salespeople making periodic calls to prospective customers they have met but not sold to is very common. More modern nurturing uses marketing automation software to systematize the process, and better target leads with offers designed to appeal specifically to them.
In his book The Leaky Funnel, Hugh McFarlane adds to the funnel metaphor and describes a more realistic version. At each stage of the funnel, customers drop or “leak” out. Imagine the funnel with multiple holes in the side, with leads leaking out all over the place, but for different reasons. Some customers do not have the budget. Others were looking for a particular feature that you do not have. Maybe your price was too high. There are any number of reasons a buyer would leak out and not move down to the next stage.
Highly effective marketing departments segment the leads that fall out by reason and aim their nurturing at those reasons. Prospects who fell out because they were looking for a certain feature, for example, should be sent an email when your product adds that feature. If a new price promotion or pricing scheme becomes available, prospects who fit the profile but fell out for budget or affordability reasons should be targeted. You might send a glowing product review to prospects that researched but did not seriously consider your product.
Creating a lead nurturing database, as we discussed in the last chapter, can be facilitated by lead scoring. Leads with scores below the MQL handoff threshold can automatically be added. Leads that drop or leak from the funnel should also be added, along with a code or label that indicates the reason.
As we discussed above, marketers increasingly employ marketing automation tolls to assist them in transforming prospects to customers. Before these tools became widely available, managing the marketing database and leads was a burden. Automated nurturing and lead scoring were extremely difficult. Targeted nurturing, based on the leaky funnel concept above, was virtually impossible. All of this has changed with the emergence of automated systems.
Marketing automation systems should have the following capabilities:
Marketing Database Management – We recommend that you keep your marketing database separate from the customer relationship management (CRM), or sales force automation (SFA), database, to keep the CRM database clean and free from the deadwood we discussed in the last chapter. The marketing automation system will also enable you to cleanse your data and segment multiple databases.
Landing Page and Lead Capture Management – The most common method of capturing a lead is via a form on a web landing page (We discuss landing pages further in Chapter 14). Creating and managing landing pages and lead capture forms can be tedious, and automation can help a marketing team focus on content rather than development and tracking. These tools may also offer web page content optimization via automated A/B testing, smart forms that recognize return visitors, and other valuable features.
Email Management – Sending out direct email, eDMs, requires a great deal of effort, including coding HTML email, dealing with unsubscribe requests and bounces, automating email delivery preferences such as form factor, and enabling sales reps to personalize they email they send to prospective customers.
Multi-Channel Management – Marketing programs may span multiple media including email, direct mail, social media, and online advertising. Tracking and managing efficacy across those channels without an automated tool can be extremely challenging.
Lead Scoring and Nurturing – Scoring leads is almost impossible to do at a large scale without marketing automation. Marketing automation enables marketers to create rules that score leads based on demographic characteristics, purchase readiness, and online activity. These systems can also automate multistep nurturing programs and the ability to automatically trigger offers based on user behavior.
Lead Routing and SFA Integration – Routing leads to the SFA system is, of course, a critical linkage, and this process should be automated to ensure timely delivery so leads don’t get cold. These systems should also automate the acceptance process of MQLs and the reintegration of rejected leads into the marketing database.
Reporting – Marketing automation systems should assist the marketing team in achieving visibility across the range of marketing activities. In addition, it should help them justify expenditures and demonstrate return on investment to the organization’s executives.
Marketing automation systems can also include other functions, such as website tracking, social media monitoring, marketing asset management, and others. Marketing teams should decide whether buying specific tools for these ancillary functions makes sense, or if the convenience of an integrated solution outweighs buying best-of-breed point solutions.
- The Leaky Funnel, Hugh Macfarlane, Bookman Media, 2003
 ”Who Created Aida?” The DragonSearch Blog, Ric Dragon, December 21, 2011 http://www.dragonsearchmarketing.com/who-created-aida
 Peterson, Arthur F, Pharmaceutical Selling, Detailing, and Sales Training, McGraw-Hill Book Co., 1949, p. 165