My second high-level glance at the headline benefits attributed to CPQ has turned up ‘Control of Margins’. Let’s take a look and see what this REALLY means.
It’s a fact that most established commercial businesses run on profit. Assuming my economics studies were not a complete waste of time, then Profit Margin = Revenue – Cost / Revenue. Please don’t get me started on the difference between mark-up and margin – we could be here a long time!
So, in simple terms if we want control of our margins, we really need control of how our salespeople allocate revenue on a deal, and how it relates to our organisations cost base.
Let’s take a look at how companies set their prices. Broadly speaking, the price of any product or service can be set as “cost plus”, or “what the market will bear”. The latter generally involves some analysis or guesswork to establish a standard – often called ‘List Price’, MRP or RRP – and it can then have discount applied in certain circumstances. If you’ve ever visited a Moroccan souk you’ll know how arbitrary an opening price can be, and how extreme a discount level can get.
Some companies set prices centrally based on one or other of these principles and allow no movement – Apple is a good example here. Others put partial or complete control in the hands of their salespeople – possibly backed up by pricing analysts or commercial specialists and bid teams.
Whichever way your organisation chooses to set prices, let’s see how CPQ can help you control your margins. A CPQ system:
1) Ensures pricing is up to date
Even if you have a simple pricing structure with pre-set prices that don’t budge from day to day, your salespeople need to know that they are using the latest price list. We regularly find companies who issue a new price list, perhaps on a spreadsheet, and somehow the salesperson forgets to save the new one. Now they’re working with redundant information. If price changes are significant, a quote can be made that doesn’t hit the profit figures required, or could even makes a loss. By storing prices in a centrally managed CPQ system, you ensure that salespeople are always working from the latest price books.
2) Eliminates errors from financial calculations
If you give your sales people authority to discount, this too can be fraught with risk. We regularly see errors in quotes from ‘fat fingers’ on a calculator through to ‘deal calculator’ spreadsheets with formula errors and out of date discount levels. A CPQ system lets your salespeople sell, and handles the ‘heavy lifting’ of financial calculations for them. If your deals are complex, this could be critical for margin control.
3) Assists in managing complex deals
When we talk about complex deals, how well does your company manage pricing on things like temporary promotions, customer specific pricing and (if you deal globally), fluctuations in currency? These can all have a significant impact on margins if not managed and implemented well, and in a way that salespeople can easily apply. CPQ lets you deploy and control accurate and intuitive mechanisms for all these scenarios.
4) Safeguards margin calculations
If you manage your pricing on a ‘cost plus’ basis, your cost-base is effectively exposed. It’s necessary for the calculations. On one deal this may not be a big issue, but if you have spreadsheets or cost-books going around that hold this master data, it’s a real security risk, and nothing will hit margins faster than your competitors knowing your costs in detail. With CPQ you can store all the deal costs securely for use in margin calculations, but only expose them to authorised individuals. This way they won’t be easily downloadable or ‘leave on a train’-able.
5) Guarantees stress-free pricing approvals
Finally, let’s consider a final critical element of margin control – pricing approvals. If you pass the final say on pricing to a manager, or specialist team, a CPQ solution can provide them with the information and analysis they need to do their job accurately. Re-keyed information can contain errors and takes time that could be spent on intelligent analysis. Centralised data on requested pricing and what was approved and won can also be invaluable over time – we can give organisations a feedback loop on their set price and discount levels to understand whether they are effective or not, and to make improvements that benefit margins, sales effectiveness and efficiency.
There are many other ways that CPQ can help with margin control. Feel free to suggest some more in the comments.
The series “What CPQ Can REALLY Do For You” is written by Walpole Partnership’s MD, Andy Pieroux.
Don’t miss out on further parts in this series which can be found on the news section of this website.