Businesses need to quickly and accurately deliver quotes to prospective customers. But businesses that sell highly configurable products often face a big challenge doing even that crucial core task. Having a robust technology-enabled configure, price and quote (aka, CPQ) process to facilitate customized orders meets that challenge while saving salesperson time, reducing costly errors and improving customer experiences.

What Is CPQ (Configure, Price, Quote)?

CPQ is an old business practice that’s been given new life and importance by information technology. Thanks to technology, more and more products are becoming highly configurable, and the rules and calculations that go into pricing each intricately customized version are becoming quite complicated. Mere mortal salespeople are finding it harder and harder to figure out precisely correct and fair prices to quote. Enter CPQ software, which generates quotes and proposals for customized products by automatically calculating prices based on the configuration (as opposed to looking them up on a price sheet or tag). With CPQ, configurations and their prices can be as advanced and complicated as the company needs without losing any precision or fairness.

People tend to think of CPQ in the context of business-to-business (B2B) deals, in which salespeople are hands-on with the CPQ software and then use its output to build a customer proposal. But CPQ systems are used by retail consumers every day, for example, to customize a coffee order. The Starbucks app lets you customize a drink (configure), determine the price using an algorithm (usually a simple addition of priced add-ons to the base price of the drink type and size you started with), and give you a full quote (the price plus location and time you can expect your order to be ready if you complete the transaction). That means way fewer hours at the cash register for Starbucks employees and more time making drinks — which turns out to be very necessary, since the ability to customize drinks in an app has caused the complexity of the average drink to rise significantly as customers configure exactly what they want.

The CPQ systems used by B2B salespeople offer exactly that type of functionality, except for far more complex product and service scenarios with potentially millions of possible combinations.

Key Takeaways

  • CPQ systems allow for highly customized products and services to be priced dynamically, saving time and making salespeople more productive.
  • They reduce costs and errors while improving speed, accuracy and customer experiences.
  • CPQ systems make sure configurations are possible by applying a set of rules and constraints, disallowing problematic and impossible orders.
  • Software is allowing more companies to offer customization, enabling insight-generating data sharing within the companies and removing some of the constraints that sales logistics have historically imposed on product/service innovation and flexibility.

CPQ Explained

Configuring, pricing and quoting are needed when products are customizable beyond the level of complexity where a simple chart can handle all possible cases. Pricing can be tricky when there are a lot of configurable options and components, but even more critically, when not every possible combination of options is actually feasible.

These days, most consumers interact with basic CPQ systems when purchasing things like food or computers. Apps for chains like Starbucks and Panera allow for a lot of customization. Pricing is usually simple, not much more complicated than the sum of the cost of the components above and beyond whatever comes with the base product the customer is configuring. For more complicated products, pricing can involve different rules and mathematical functions; software is needed to enable more complicated and dynamic pricing structures that can’t easily be done by hand.

All these factors are present in enterprise software sales, especially when the software is delivered on a subscription basis as software-as-a-service (SaaS). CPQ systems make it possible for SaaS salespeople to sort through a prospective customer’s requirements and design a custom configuration in real time, giving the customer only the options it needs, for an accurate and fair price.

CPQ systems don’t just need to do dynamic pricing of different configurations, though; they need to make sure products are possible. If you customize an enterprise resource planning (ERP) system, you won’t be able to add data analytics functions without the data warehouse option that makes such analytics possible. And if you’re ordering a sandwich on Panera’s app, you can remove any of the fillings you want — “no onions” is easy to implement — but the app won’t allow you to get rid of the bread. This is a rules-based constraint enforced by the CPQ system. Good CPQ implementations for any product type will likewise have constraints that don’t allow salespeople or customers to input an impossible (or in some cases illegal) order.

How Does CPQ Software Work?

CPQ software and modules efficiently gives choices to customers, considering both what makes sense for the business and potential actions by customers that might not make obvious sense. When designing CPQ software rules, it’s important to think about all the ways that a user could “break” the system by trying to do something they shouldn’t. You also want to make sure not to accidentally eliminate valid choices. And just because an order is possible doesn’t mean it’s desirable for the business — unprofitable configurations can be eliminated, too.

CPQ software runs on a three-step process, which — wait for it — is:

  1. Configure,
  2. Price, and
  3. Quote.

Within each step the software runs a different process, applying rules to inputs to determine what’s feasible.

cpq figure 1

Configure

For the user of a system, configuring an order may be as simple as checking boxes on the options they choose. But behind the screen, the software is constantly checking the choices made against a set of rules determining what’s possible and what things cost. It’s possible that choices made in one area remove choices made in another. If you’re configuring a vehicle, there may be a maximum weight of all your add-ons, so the more heavy things you add, the fewer remaining options — and combinations of options — you have left available.

In some cases, choices may be mutually exclusive (e.g., when configuring a sandwich, you might have both lettuce and tomato but you can’t have both marble rye and pumpernickel bread). These constraints need to be set up in advance, and the system will only be as accurate as the input constraints are accurate and complete. Constraints can be on a variable, such as total weight, size, or power usage, or they can be about specific relationships between options, such as two features which are incompatible or two features that must go together. Software that’s well set up will only let users configure orders that are feasible and legal.

Price

In a manual process, pricing happens after the configuration. But in CPQ software, prices can be updated in real time as users make choices as long as there are default values of choices yet to be made. When options are added onto a base model, it’s very easy for pricing to adjust as user choices change. Customizing a computer purchase online usually has this functionality, but it can work for more complicated (and less linear) situations as well. Tax software, for example, often has a feature where you can see your expected refund rise and fall as you enter information; CPQ software pricing can be displayed similarly.

Quote

Once the configuration and pricing are complete, quoting can be as easy as telling the customer the price. But more typically in B2B sales, a salesperson takes the CPQ results and uses them to fashion a proposal that is then brought to the customer for discussion and negotiation of remaining variables, such as deadlines. Software can add value here by automating the process, sending an e-mail with a detailed quote that includes breakdowns and payment schedules, and even estimates when the order will be complete and what will be required from the customer in terms of information or other inputs. This information can be purely rule-based, but it can also incorporate data from other parts of the business (e.g., how busy the production team is or how much of a factory’s capacity is available, when).

Why Is CPQ Important?

There are many good arguments for why a good CPQ process is important, but they all boil down to serving customers well by giving them many choices while managing pricing for the potentially enormous number of potential configurations that might result. That latter challenge relates to a branch of mathematics known as combinatorics.

Choice: The “C” in CPQ stands for “configure,” but it’s just as accurate to think of it as standing for “customize” — and either way, we’re talking about “choice.” Customers like choices. In some cases, they need choices. If you’re ordering food and allergic to some ingredients, you might need to customize your order or not place the order at all. Similarly, if you’re running a discount domestic airline and in the market for jets, you’re not going to have a use for planes configured with international first-class seats. Whether spending $50 on dinner or $50 million on a jet, customization is important. Some businesses just won’t be able to survive offering a small number of preset options (Boeing and Airbus certainly couldn’t), while other businesses are going to try to develop an edge by offering more choice and customization. Dell, for example, first made a name for itself against larger players by offering customers more choices in their computers’ configuration and price. CPQ systems enable many different choices.

Combinatorics (math): Acknowledging that customers want, and in some cases need, choices and customization, the importance of a reliable CPQ process to manage pricing becomes apparent. It’s simply not possible to have a preset price for every option a customer can buy the same way a retail store has a price for everything on the shelf. Think about the fairly commonplace challenge of assembling a fleet of vehicles for a business. For the sake of simplicity, assume a company wants to order only one type of functionally identical vehicles. Still, the vehicle manufacture offers:

  • Three base models with different engine sizes.
  • A dozen binary options (individual features that can be added or omitted).
  • Three exterior and three interior colors (keeping it simple, let's say they can each be black, white or beige).

Before we even discuss client-specific customizations (like logo printing or configuring space for specialized equipment), the “menu” of possible configurations is already over 100,000 items — 110,592, to be exact. To follow the math: It’s 3 (base models) X 4,096 (i.e., 212 possible combinations of optional features) X 3 (exterior colors) X 3 (interior colors). And prices will depend not just on configurations, but on the volume ordered and the speed with which the order needs to be fulfilled. It's not uncommon to use CPQ for products that have literally millions (or even billions) of possible configurations.

Obviously, some streamlining is necessary. With something that fits in a garage, a CPQ system can be pretty simple — perhaps fitting on a piece of paper a customer uses to check off his or her choices. But imagine configuring a fleet of airplanes or a new headquarters for a Fortune 500 company, which also has millions of options, but the presence of some choices changes what’s possible and easy with the others. For example, if the base you’re building on is a 737, you can’t fit 500 seats.

Without CPQ, businesses would have to constrain the options that they can profitably offer to customers in order to reduce the possible permutations to a manageable level.

What Is the CPQ Process?

Most people think of the “CPQ process” as the configuring, pricing and quoting that we’ve been discussing so far. But some use it to refer to the larger B2B sales process of which CPQ is a key part. In those cases, the CPQ process is a longer chain of steps that look something like this:

  1. Configuration
  2. Price
  3. Quote
  4. Proposal
  5. Negotiation
  6. Approval (from both parties)
  7. Order
  8. Production
  9. Delivery
  10. Installation / Setup (if applicable)

Different sources lay out the sales process slightly differently, and some cut it off earlier, but this is a rough outline of the sales journey businesses and customers expect when using a CPQ process. For businesses that sell directly to consumers and don’t use salespeople, the process is simpler, and will look more like this:

  1. Configuration
  2. Price
  3. Quote
  4. Order
  5. Production
  6. Delivery
  7. Installation / Setup (if applicable)

Companies like Starbucks and Domino’s offer their customers a lot of customization, but most of the steps are fully automated. The quote is the proposal; there’s no opportunity to negotiate; approval is automated on their end and the click of a button for the consumer. Installation and setup are rarer in consumer-facing markets, but not unheard of.

cpq figure 2

Benefits of CPQ Software

There are many specific benefits of using CPQ software for customizable products, and each one saves time, saves money, and/or improves the customer experience. Here are five key advantages to using a CPQ system.

  1. Speed: CPQ software creates dramatic improvements in how fast a salesperson can get a customer from desire to a reliable, confirmed quote. The time to complete the process is often a full order of magnitude (10 times) faster with CPQ software than without. Shorter sales cycles free up time for salespeople and can lead to higher annual sales with the same size team.
  2. Improved accuracy for customization and pricing: CPQ systems can give accurate and real time information about what is and isn’t possible, which means salespeople aren’t making mistakes, offering guesses, or having to check with someone else to get answers. The pricing is nearly instant and doesn’t require as much scrutiny for approval, which in turn can increase the speed of sales even more. This meaningfully improves the average customer experience, while also saving time that would otherwise be needed to fix mistakes.
  3. Fewer errors: Manual processes have lots of room for errors, from simple miscommunications and typos to fundamental misunderstandings of what’s possible and feasible. A good CPQ system means fewer interactions where salespeople promise something the company can’t deliver.
  4. Improved visibility of options: CPQ systems are used on complicated configurable products. Even seasoned salespeople can’t have the entire ever-changing catalog of options and relationships between options committed to memory. Using software to configure products will bring up options that a human might have missed. If the software is integrated with other data sources on customer preferences and behavior, it may even be able to make suggestions based on the good experiences of other customers.
  5. Data exhaust: A CPQ system doesn’t just leverage data — it also creates data. At the very least it will be collecting data on exactly what customers ordered, when, and what they were promised. This kind of data can help improve sales forecasts. Beyond that, companies can configure CPQ systems to collect data on options a customer was interested in but ultimately decided not to pursue, which can be an input into research for future improvements and new products.

CPQ & CRM

CPQ systems and customer relationship management (CRM) systems are often discussed together, and some companies view CPQ as an essential component of CRM. There’s nothing about the functions that necessitates they be part of the same system; a company could use a CRM platform for managing data and interactions with customers while having a separate system for their sales teams to support CPQ tasks. But many companies find it useful to have both within a single integrated platform, with shared data.

CPQ conversations and suggestions can be informed by information in the CRM system, and those CPQ conversations will usually lead to new information about the customer (or potential customer) that belongs in the CRM system. Even beyond the advantages of having one system, from a practical standpoint, it’s easier for salespeople to manage the information flow if they’re getting data from, and entering new information into, the same system.

Choosing the Right CPQ Platform for Your Business

CPQ systems are themselves configurable products, which means that choosing a good CPQ platform for your business may involve having CPQ conversations with potential providers. Before reaching out to vendors, though, consider what’s important to your business. What kinds of rules and constraints go into your configurations? How complicated is your pricing formula (or how complicated would you want it to be if it was all automated and could happen instantly)? Is it important that the software be able to handle communication and data-tracking tasks, or do you prefer those tasks be handled by sales teams? The first step to choosing the right platform for a business is knowing which features would help the business and which features wouldn’t contribute value.

Regardless of how a CPQ platform is configured, one of the most important decisions is if the CPQ is to be integrated with CRM and/or ERP systems. If you already have a good relationship with a provider of those other services and you want your CPQ system integrated, then the main question is: “Can my current CRM/ERP provider meet my CPQ needs?” If that integration is not mandatory or even desirable, however, then you’re more of a free agent.

New and growing businesses just beginning to implement business software solutions may not be shopping only for CPQ. You’ll probably be shopping for a software provider that can handle many different tasks, from inventory tracking to customer interaction management to CPQ. In this case, the right way to choose a CPQ platform is to choose a company that can meet all your current needs, grow with your business, and be a good business partner to work with for years to come.

Manage Your CPQ Process With NetSuite

NetSuite CPQ offers customizable functionality with expanded features and integration into NetSuite’s larger offerings of cloud-based ERP software. In addition to configuration, dynamic pricing and quote-generating features, NetSuite CPQ goes beyond quotes to generate full proposals. It can also reduce manufacturing costs and lead times by incorporating configuration rules that directly generate bills of materials (BOMs) and routing instructions to prepare for creating the orders it generates. As an add-on module to a larger suite of scalable services, NetSuite CPQ is most appropriate for businesses looking for a single software provider to handle a variety of data management and analytics challenges to streamline sales, production and delivery.

Conclusion

CPQ systems are increasingly becoming essential for salespeople selling customizable products, and it’s easy to see why: The value CPQ adds through increased speed and accuracy is unparalleled by any human process. When configuring, pricing and quoting become easier, it opens the door for companies to offer even more customization and loosens the constraints that the sales process places on how ambitious next-generation products can be. Going forward, CPQ systems are likely to become more widespread in both business- and consumer-facing industries. Customers love having choices and getting something customized just for them, and CPQ systems are the technology on which industries deliver exactly that.

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CPQ FAQs

What Does CPQ Mean?

CPQ stands for “Configure, Price, Quote”. It’s the process through which businesses sell customizable products. Software has made this process faster and more reliable, and “CPQ” has become an acronym as more businesses offer customized offerings.

Is CPQ part of CRM?

CPQ can be addressed as part of customer relationship management (CRM), and some software products will serve both purposes. While there are advantages to having all the data in the same system, addressing them separately is an option (and data can be merged after the fact).

How does a CPQ system work?

A CPQ system applies preset rules to user inputs to configure an order (and disallow impossible configurations), determine a price for that order, and generate a quote. It can do instantly what used to be a complicated, manual and error-prone process.

What is CRM and CPQ?

CRM stands for customer relationship management. CRM systems are software that help businesses keep track of their interactions with customers and what is known about them. CPQ, “configure, price, quote,” is a process for selling customized products. Some software systems integrate both, though there’s no requirement that the two functions be intertwined. It can be helpful, however, to leverage known data about customers (such as preferences, budgets and past orders) for generating better recommendations.