The P of CPQ is often the most complex. It stands for pricing, and it’s no easy feat to manage that pricing flawlessly. With pricing, everything can become a specific exception on specific products. But, with CPQ, even a messy, manual mess of pricing algorithms can become seamless and even simple.
The purpose of this article is to teach you what you need to know to conquer the pricing part of CPQ. The previous blog covered everything to know about configuration (the C of CPQ), and this blog is building off that knowledge to take you to the next step. First, we’ll go over the different types of pricing methods, then we’ll explore the importance of consistency when handling CPQ pricing, and finally, we’ll look at how CPQ can be a great opportunity to revisit and simplify your pricing habits.
Pricing method types
Before implementing or updating your CPQ solution, it’s critical to understand what sort of pricing method you’re utilizing. Here are some of the most common pricing methods used across different industries:
List Pricing: The most simple approach to pricing is list pricing. This is where you retrieve the product price from a price book or a price list. You could also manage multiple price lists to address price differences between markets or other parameters.
Cost + Markup: Typical for resellers, the Cost + Markup approach determines the list price of a product by starting from the cost of the product to which you apply a markup. This method is also recommended when you want to target a specific “standard” margin.
Percent of Total: Sometimes also called “dynamic pricing,” the Percent of Total method involves calculating the list price of the product by applying a specific percentage to the price of one or several other products. Such other products represent the base value to which the percentage is applied. The base value in question can be calculated based on the list price of the other products, their net price, or any other value you want to consider. Some CPQ tools automate the calculation of such dynamic pricing under specific conditions. The most common application of this pricing method is for support or maintenance services: for example, you price your support service at 20% of the price of the software license amount purchased by your end customer.
Volume Pricing: Volume pricing is varying the list price based on the quantity that the end customer wants to purchase. It is often applied as a volume discount, rather than a different list price. Taking the volume discount approach is usually preferable from a financial analysis perspective.
Term Pricing: Term pricing is when the list price varies based on the term of the contract with the end customer. This is applicable to recurring revenue products only. Your price might be different for a 12-month term than it is for a 24-month term. This method, too, is often applied as a discount. And just like with volume pricing, taking a term discount approach is preferable from a financial analysis perspective.
Block Pricing: Block pricing consists of selling your products by buckets of quantity, at a specific price for the entire bucket. Everybody is likely familiar with this concept when it comes to their cell phone plan: you buy a block of minutes, a block of bytes, or a block of text messages. Whether you use all of these minutes or bytes or text messages, or only a portion of them, it does not change your purchase price. The major difference with this type of pricing method is that you are no longer selling your products with a price per unit. Instead, you sell with a price per block, with the side effect that for your end customer, their purchase price per unit becomes variable based on their consumption.
Attribute-Based Pricing: Attribute-based pricing is varying the price of a product based on the value of one or more attributes of the product, as requested by the client. Some common examples include selling clothes with a different price based on the size (small, medium, large, XX, and so on) or selling products where the end customer can choose a finish (paint or fabric) that impacts the price of the product. This model can easily get complex as you increase the number of attributes, and you might need to consider all the possible combinations of attribute values. On the other hand, it simplifies your product catalog since a single entry in the catalog represents multiple variations of the product. These attributes are usually considered part of the configuration of the product, as they need to be specified before you can correctly price the product.
Customer-Specific Pricing: Customer-specific pricing is a way to offer a pre-negotiated price to a customer. The price is typically set as an agreed-upon amount or as a discount against the normal list price of the product. In many cases, this specific price is only valid for a specific period of time, and more complex variants also include a customer-specific tiered pricing approach.
The importance of consistency
Your pricing strategy likely involves multiple dimensions: discounts, add-ons, renewals, promotions, and more. To expertly manage pricing in the face of all that, consistency is key. While it’s ideal to use default pricing behavior, this behavior can be overridden, if necessary–as long as the strategy is consistent.
Next, your add-ons, discounts, and other extras must have consistent processes. For example, with discounts, the pricing model can get very complex. But that doesn’t mean it’s inconsistent. A complex pricing method can champion consistency and bring simplicity into the implementation via automation. The more you automate discounting policies, the less discretionary discounts your sales reps will have to do, giving you more control of your margins. By simply automating and applying a consistent approach to discounting, you can know where you’re going and have predictable margins.
This same thinking can be applied to other pricing complexities, like add-ons, renewals, and more. Whatever elements your pricing approach includes, they can be made consistent and simple with a little automation help.
Without consistency, your sales reps will need to use discretionary discounting as their only pricing tool of choice to help close deals. This requires robust mitigation tools and complex approval processes to make sure you preserve margins. Having a structured pricing policy taking advantage of automation in CPQ gives you much better visibility over discounting levels and reasons, which in turn reduces or eliminates the need for mitigation since company-driven pricing policy are considered pre-approved. Finally, this structured pricing approach reduces sales cycle and contributes to increased productivity and revenue opportunities.
An opportunity to revisit and simplify
CPQ is a journey, and the pricing stage of that journey is a great chance for self-evaluation. Too often, companies end up having a specific price for every product and every client, and you quickly reach an unmanageable situation. It is recommended, especially when making the jump to CPQ, to simplify. While letting go of old habits may invoke the fear and worry that your clients won’t stay with you, we’ve seen it work time and time again.
A CPQ implementation is an opportunity to revisit pricing policies and change for the better. You can make sure your pricing strategy is adapting to market conditions and evolved alongside the market. It’s a chance to take new criteria into account and integrate CPQ’s out-of-the-box implementation with your pricing needs.
I have seen too many times companies who could no longer explain their pricing strategy. They had applied band-aid after band-aid over the years, almost always leading to a situation where every single price was arbitrary or custom because they thought it was the only way to close a deal. Remember an important concept: if you can’t explain to your own sales reps how your products and services are priced, they will not be able to explain it to their end customers either. Your clients will be confused and lack to perceive the value you can contribute to their business, and they will consider that it is difficult to do business with you. This will decrease their loyalty towards you and increase churn rates. Consider your client acquisition cost vs. increasing customer retention. Your pricing strategy is an important tool in this equation.
CPQ implementation readiness is all about knowing where your pricing is now and where you want your pricing to be. And thinking through specific pricing scenarios can reveal pain points, goals, and complexities—all insights that will make your CPQ implementation run more smoothly as you articulate those needs with your implementation partner. The P of CPQ may be in the middle, but it can’t be an afterthought.