The New CPQ: Configuring Deals vs Configuring Products

When it comes to today’s modern business models, you don’t need to configure products…you need to configure deals.

What do we mean by that?

Quick background: CPQ (Configure, Price, Quote) software is technology that helps sales teams quickly produce accurate quotes. When product offerings grow, many businesses choose to start using a CPQ to help manage the complexity of pricing.

To be honest, in most situations the majority of businesses can manage pricing and quoting for their products without a CPQ. Unless your sales team is making serious errors or losing prospects due to a long and messy quoting process, then a traditional CPQ isn’t going to bring great value to your business.

But what you do need is a system that can support your ability to configure deals.

Configuring products vs configuring deals?

Configuring products vs configuring deals?

This isn’t just semantics. The difference is huge.

Traditional CPQs weren’t built to support today’s modern business models. They are built to configure product cost. But today’s monetization models are built around outcomes, not products. Thus, businesses have shifted from configuring products to configuring deals.

Let’s take a closer look. In the old product world, you were swimming in a mountain of SKUs. Each SKU represented a shirt color, a hard drive size, an engine speed, etc. To configure a product, your customer would select their SKU, and tell you how much of it they wanted. You’d attach the price, sum the total, and stamp the quote with the date. When you’re quoting in a product world, your quote simply turned into an invoice and a bill of materials that shipped out with the product. That’s pricing a product.

In the subscription world, you’re thinking about how to configure a deal. It’s not just about a quantity, product, and price. You now have deals with varying prices, charge models, discounts, contract durations, and billing frequencies that change over the lifetime of a contract. In the subscription world, every quote fires off a series of actions that happen throughout the entire order-to-cash lifecycle.

Consider a typical subscription quote spanning three years that starts with an upfront platform fee, and includes an overage usage fee that’s billed monthly in arrears, and a discount applied in the first year while quantities are ramping up. Because all these varying parts of your quote span multiple years, you’re not just check summing the total like you did on a product quote. And now you’ve got a new set of forward-looking metrics — including annual contract value, total contract value, and total contract billing—to look after.

Common Deal Scenarios

To configure deals you need the ability to manage these common deal scenarios and complexities:

• Extending the terms of an existing contract. There are many use cases where you’d need to extend the terms of an existing contract. Your customer may want to add a new product in the middle of their contract. Or maybe it took longer than expected for the customer to go live so you need to push out the existing contract. This is a common scenario, that shouldn’t require the creation of a new quote for each contract change.
• Customer-specific pricing. Every customer is different. They value your products and services differently and want the ability to pay based on their perceived value. This means you need to allow customers to mix and match any variation of charge models, from volume tiers to overage rates, promotions to limited discounts, and more.
• Ramp deals. When one or more variable in your deal steps up or down over time, you need the ability to manage the ramp. The days when customers buy everything upfront are few and far between. Today’s consumers want to be able to sign-up for a multi-year agreement and have the flexibility and freedom to make changes throughout their contract, whether that’s increasing the number of seats as their business grows, redeeming a discount during an implementation period, or adding and removing products as needed.
• Future contracted bookings and best case upsell opportunities. As you’re selling through each quarter, you’ll want foresight into your future contracted bookings and best case upsell opportunities. Seeing ACV broken out by future quarters and opportunity types like new business, contracted ramp, and renewals let’s you see what you’ve already got in the bag. And understanding how customers are using your products and services allows you to identify new upsell and cross-sell opportunities.
• Sales compensation model. What you close and when you close affects your sales compensation model. In a recent CFO survey, 48% of CFOs said they retire quota attainment based on ACV. You might be retiring quota by ACV, based on the incremental changes to ARR; by TCV, based on the total value of the multi-year agreement; or by TCB, based on how much you bill your customers. Regardless of which compensation model you take, you need to be able to get the right set of metrics that your sales compensation tools can use to accurately pay out your sales reps.
• Forward-looking metrics. Subscription metrics like MRR, ARR, and CLTV are important not just to pay out on any sales compensation model and to forecast bookings, but to identify upsell opportunities, ward off churn, satisfy your board, and get a read on the general financial health of your business.
• Downstream impacts. There are major downstream impacts to billing, payments, and revenue that occur every time you sell into your existing install base. Let’s say one of your customers decides to upgrade. You have to be able to go back and amend an existing quote, create an order for that quote thus kicking off a series of downstream actions. Then you need to deprovision old services and provision new, generate a new set of recurring invoices with related credits and prorations applied, collect the payment due and retry any that have failed, and, finally, update ASC 606 revenue contract and performance obligations. Without a system that can support the entire order-to-cash process, a business will not be able to properly support critical growth initiatives, product will struggle to create new pricing models, and finance won’t be able to manage billing.

So the question is: Is your business configuring deals or products?

Check out Zuora CPQ, the only solution purpose-built for subscription businesses.