In the rapidly evolving landscape of 21st-century sales, businesses worldwide are catering to the individual needs and preferences of their customers like never before using mass customization and product platforms to remain efficient at scale. Configuration has become a key aspect of sales strategies, allowing for personalized solutions and tailored products without the added lead time, cost, and quality risks of bespoke tailoring. One of the tools that have revolutionized both B2B and B2C sales processes is the CPQ system. CPQ, which stands for “Configure, Price, Quote”, streamlines the sales process by automating the product configuration, pricing, and quote generation. By implementing a CPQ system into their operations, businesses can perfect their sales processes, increase efficiency, and ultimately drive revenue growth.
The vast majority of the available commercial CPQ systems on the market are integrated solutions, either as specific CPQ systems, or as part of an even larger integrated solution such as a CRM or ERP solution. Even though your business may already have other solutions for sales portals, pricing, or document generation, you are forced to buy a complete packaged solution. This either puts you at risk of buying functionality that you don't use, or of having to change existing systems and processes that aren't broken.
In this blog post I will explain the basics of CPQ, how it works under the hood, and suggest a modular alternative to buying the one-size-fits-all integrated solution.
What is a CPQ system?
A CPQ system is a solution supporting the sales of a configurable product. The inputs to the system are traits and needs of a customer and the customer’s application of your product, and the output is a priced quote for a suggested product configuration. Once the quote is accepted, the CPQ system interacts with the next system or task in the order fulfillment process, typically the ERP and/or PLM system.
CPQ stands for Configure, Price, Quote. The acronym implies that a CPQ system has three main tasks:
- Configure: This task is to translate a set of data about the customer's preferences, needs, and application to suggest one or more valid products that can fulfill these requirements. The CPQ system will use a predefined set of rules for how to do this (a configuration model). The product could either be selected from a table of preconfigured available products, or by configuring a product from predefined or custom modules.
- Price: This task is to set a price for the suggested product. The task can be complicated of course. In the simplest case of predefined products, a price list can be used to look up the price. If the product is configured the price must be calculated according to some logic, there are also possibilities to have different price lists, discount systems, value-based pricing, and so on.
- Quote: The third task is to generate a Quote that can be sent or presented to the customer. The quote typically would include a description of the suggested product, terms and conditions, price and payment terms. A fully digital process allows for direct quote acceptance, but the quote could be handled in different ways in the CRM process.
Other terms used for similar solutions to CPQ are Sales Configurators or Product Selectors. These terms imply less focus on pricing and quote management, focusing on the task of finding the right product for the given need and application.
The data output that is sent to the next task or system in the order fulfillment system could be a specification and/or a bill of material (BOM) at some level. If the output is a specification, the next system must translate this Specification to a BOM with the right level of granularity. The data transfer between CPQ and the next system could be manual or fully automated. Many solutions require some human intervention, depending on the product complexity.
The CPQ process: Transform customer needs into tailored product offers, generate accurate BOMs (Bill of Materials), and streamline manufacturing with configurable solutions.
Three Key Benefits of Using a CPQ System
Configuring, pricing, and quoting complex products and services can be a challenging and time-consuming task for sales teams. A CPQ system is a software solution that automates this process and helps you create accurate and compelling proposals faster and easier. In this chapter, we will explore three ways how a CPQ system can help you improve your sales.
Increase Conversion Rates and Customer Satisfaction
A CPQ system increases sales by enabling more effective and personalized customer interactions. It allows sales reps to tailor their offers to the specific needs and preferences of each customer, resulting in higher conversion rates and customer satisfaction. By continuously improving the data gathering on customer needs, traits, driving forces, and how to suggest solutions that are tailored to trigger customer desire, sales will flourish!
Make your Experts Scalable
A CPQ system reduces the complexity and effort of selling complex products by capturing the domain knowledge and best practices of experts and applying them to different scenarios and customer segments. It will reduce the need of training of the sales reps, and help them to navigate the product catalog, select the optimal configuration, and generate accurate quotes in a timely manner. Faster turnarounds of requests drive a higher win rate.
Increase Cross-Department Collaboration
A CPQ system improves collaboration and communication across different departments by integrating and automating the configuration, pricing, and quoting processes. It ensures accuracy and consistency of data and documentation, eliminates errors and rework, and streamlines the approval workflows.
How to successfully implement a CPQ solution
The key to a successful CPQ implementation is to be well prepared. There needs to be an aligned cross-functional view of the Why and the How of the CPQ solution. Implementation can often be done in steps, but the long-term vision must be shared and anchored throughout the company. But aligning on the vision and evaluating the benefits are merely the first two steps of the path to a successful CPQ implementation.
Peeking Under the Hood: The Modules of the CPQ system
The term “CPQ system” implies that it is an all-in-one system. But, under the hood there are some key functionalities that are necessary to include. By looking at the components, or modules, of a CPQ system we can open the door to a composable system architecture where the business can select the best solution for each function given their context, and that a function may be used across multiple different solutions.
Conceptually, we can say that each CPQ system will require at least five fundamental functions/modules:
The five fundamental modules of a CPQ system: Front-end, configurator, visualization, pricing, and quotation, form the core functions required for efficient and streamlined sales processes.
CPQ Front-End: Sales Portal
The Sales Portal is an application, typically a web application, that presents the graphical user interface to the user and gathers data from various supporting blocks underneath.
In its simplest form, the Sales Portal only presents a suggested solution as a tool for finding the right product. However, in most CPQ scenarios, users need the ability to save configurations, reopen them to make changes, and use a shopping cart to purchase multiple products together.
The Sales Portal may also allow users to place orders for the products in the shopping cart.
Configurator
The configurator module provides the functionality to provide a set of questions with allowed answers. Once the configurator receives an answer it updates the list of questions and allowed answers based on that. The configurator will also provide a valid specification and/or a bill of material based on the answers given.
To do this the configurator engine must have a set of rules and definitions to execute. This set of rules is called a configuration model. The configuration model will be changed over time as the product or the allowed configurations change. Because of this the configuration model must be managed so that we keep track of its releases. What is a valid choice or configuration at one point in time may be different at another point in time.
To define the configuration model a design environment is needed. This is where the product and its configurability are modeled, and constraints are added to control the allowed combinations of values. The configuration model typically also includes definition of which questions to ask and how. There may be a logic around the questions as well, if they are dependent on each other, or if there is an order of priority of which answer to default to.
Visualization
Visualization is a crucial component of modern CPQ solutions, providing a clear representation of the configured product. Gone are the days when simple dropdown menus were considered sufficient for a graphical user experience. Today, the level of visualization can range widely based on the business needs and available resources.
At the most basic level, static images may be used to represent choices. However, more advanced implementations leverage immersive, photo-realistic 3D scenes to showcase the configured product. These visualizations not only enhance the user experience but also provide a deeper understanding of the configuration.
Various technologies are available for creating 3D visualizations, ranging from WebGL, where the client device handles rendering, to solutions like Unreal Engine with Pixel Streaming, which utilize cloud services to render scenes in real time and stream them to the user. The right approach depends on the desired level of detail, performance requirements, and technical infrastructure.
Assuming a significant number of possible configurations, and a need to render the actual configuration in the user interface a visualization engine is needed. This engine has the job of combining visualizations of module variants into a product in a compelling scene. The engine will use an asset library including visualization data for the module variants available in the configurable product. To generate a 3D scene, some format of 3D artwork is needed.
To generate the 3D artwork a design solution is needed to for example convert, clean up, and visually improve CAD data to reach the desired fidelity.
Pricing
In the simplest case, where all configurations are predefined, the price for each configuration can be predefined in a price list. But, just as for visualization, as soon as we have a significant number of possible configurations, we want to have a solution calculating the price of the configuration at runtime. The function doing this is what I call a pricing engine. The functionality of the pricing engine is to take a configuration as input (spec and/or BOM), calculate and return the price for it.
To achieve this, a price model must be both designed and managed. For smaller operations, this may be straightforward. However, when dealing with multiple markets, discounts, volume agreements, etc., the complexity of the price model increases significantly. In such cases, it becomes essential to use multiple price lists that include logic for calculating the price.
Quotation
To be able to complete the sales process we must present our offer in a compelling and structured way. The quotation generator is the function responsible for generating and presenting the information needed for the quotation, e.g. a specification of the configured product, and a quotation. The information can be made available in different forms, e.g. as a web page, or a document that can be sent by e-mail, downloaded, or printed. To generate this information, the generator needs to have templates and content that can be added to these templates.
Many generators rely on Word and Excel formats as templates and content snippets, like texts or illustrations, are stored in a database.
Using an Off-the-Shelf CPQ software or creating a custom best-of-breed solution
There are many CPQ solutions available on the market. The other day I looked at a popular software listing site, in its CPQ category no less than 174 products were listed. Some CPQ solutions are embedded in even larger systems, typically CRM or ERP, some are standalone. What is common across most available CPQ solutions is that they are complete packages, including a solution for each of the five fundamental functions needed. While it may seem tempting to have a one-stop-shop supplier of the CPQ solution, there are cases where this is not the best route.
High-End Requirements Case
Businesses that require a very high-end performance for one of the fundamental CPQ functions will likely select a solution that excels in that specific function. However, when a solution is needed that excels in multiple functions, the options quickly narrow down to none.
Existing Solutions Case
Many companies already have existing solutions for one or more of the fundamental CPQ functions that are working well and executing in a well-oiled machinery. As an example, a company has well-functioning pricing and document generation solutions. If they buy a monolith CPQ, they risk having to replace the existing well-functioning solutions. Or, even worse, they risk adding solutions that will work in parallel with these existing solutions multiplying the systems to maintain. Another typical effect is that the company buys a monolith CPQ, and then uses only a fraction of its functionality, at the full price.
The Best-of-Breed Strategy
Another way of finding a solution is to not look at complete packages, but instead build a custom solution based on different components for the different fundamental CPQ functions; for example, combining a headless configurator for constraint-based configuration, with a photo-realistic pixel-streaming service for visualization, and integrating these components with an e-commerce solution that handles pricing and quote generation.
This way of creating a custom solution based on available modules can in many cases give better performance, and less implementation effort, than customizing a monolith solution to your needs.
To drive the best-of-breed strategy, you must look for solutions that are developed to be a part of an efficient puzzle. Words to look for are headless, API-first, and web services. For more reading on how to approach a composable software strategy I recommend a visit to the MACH alliance.
The CPQ process is cutting across the boundaries of Sales, Development, and Operations
In the traditional system landscape of sales systems (CRM), engineering systems (PLM), and production systems (ERP) each system is mainly concerned with the organizational unit that is owning and using it. CPQ naturally cuts across these invisible boundaries, and while this is what makes CPQ a real game changer, it is also a key factor in its complex implementation. When implementing CPQ, the target is to seamlessly communicate between these systems, and that requires cooperation and alignment. In many companies where there are multitudes of legacy systems, add-ons, and integrations this is easier said than done.
What is clear is that, if we only add CPQ without having a clear vision for how to solve the end-to-end information flow with a consistent view of the product, we are adding even more complexity to the system.
Tuning the engine of your existing CPQ system
From time to time, I meet companies that have a well-functioning CPQ system from the front-end perspective. The user interface does its job, the sales reps are well guided, etc. However, the problem is that the performance is too low. It may take minutes or even hours to complete a configuration. A slow configurator defeats the purpose of the CPQ; we want to be able to quickly see different alternatives, make adaptations, and generate a new quote to present to the customer. Some companies try to remedy this by separating the product portfolio into many different configurator models, each with a smaller scope. However, this solution increases the complexity of model design and maintenance, and it forces the sales rep to select the right product as a first step in the configuration process.
What if there was a way of just replacing the engine of your existing CPQ? Just like you could change the GPU, or add RAM to your gaming computer to boost its performance?
In a future blog post we will dive deeper in this topic. If you're interested in discussing what is possible already today – give me a call!
AUTHOR
Tobias Martin
Vice President & Partner
+46 8 456 35 00
tobias.martin@modularmanagement.com
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