CPQ + Dynamic Pricing: The Winning Formula for Sales Agility

June 27, 2024

Configure, price, quote (CPQ) software is perhaps the most important tool for modern sales teams. It enables them to configure products for customers, calculate pricing automatically, and deliver a professional estimate or proposal in real time.

However, even with a CPQ solution in place, sales teams can still face challenges when it comes to agility and flexibility:

  • Limited pricing with a fixed pricing structure
  • Inability to quickly adapt to changing market conditions or customer demands
  • Difficulty in offering personalized pricing for different customers or market segments
  • Inefficient manual processes to update pricing and quotes

Rigid pricing rules are restrictive when you’re trying to win deals and stay ahead of the competition. That’s where dynamic pricing comes in.

Dynamic pricing is a software-driven approach to pricing that allows companies to adjust prices instantaneously based on demand, market prices, competitor pricing, production costs, current availability, and several other factors.

If you’re selling complex products or those with variable inputs, using a CPQ solution with dynamic pricing capabilities will give your sales team the edge they need to win deals and drive revenue.

The power couple: CPQ and dynamic pricing management

Modern CPQ systems lay the foundation for dynamic pricing. CPQ is the starting point for product configuration and pricing calculations, and it integrates with your ERP system to access real-time product, pricing, and customer data.

Dynamic pricing engines then take this information to generate optimized prices based on AI algorithms and preset rules (which you configure during implementation).

The process looks like this:

Step 1: The seller configures the product in CPQ.

The seller logs into the CPQ system and selects the product or service they wish to configure. Your CPQ interface displays a set of predefined product options and attributes, which the seller can customize based on customer requirements.

They choose the relevant product options, features, and attributes from a list provided by the CPQ system. Options might include different models, sizes, colors, additional features, and accessories.

In a guided selling workflow, your CPQ system automatically applies predefined product rules and constraints to guarantee only valid configurations are possible. These rules may include compatibility checks, mandatory options, and exclusion criteria (e.g., if Option A is selected, Option B cannot be selected).

The seller can further customize the product based on specific customer requests. Depending on product complexity, that could include bespoke features, tailored services, or unique combinations of existing options.

Step 2: Your CPQ initiates a pricing request.

Once you’ve configured the product, you move to the pricing stage. At this point, CPQ sends a pricing request to the dynamic pricing engine.

This request includes all relevant product details and customer information. The dynamic pricing engine uses AI to add the contextual data (e.g., market conditions, competitive landscape).

Step 3: The dynamic pricing engine processes the request.

The dynamic pricing engine collects real-time data from various sources. For example, it might factor in the product’s production cost, current inventory levels, customer-specific pricing agreements, competitor prices, demand elasticity, and other market trends.

From there, it applies predefined algorithms and rules to process all this data.

At this stage, you can also configure different pricing strategies within your dynamic pricing software. For example, you could decide to offer a discount based on volume or set specific price floors to maintain margins.

The dynamic pricing engine then generates an optimized, personalized price based on all the inputs.

Step 4: CPQ displays the price.

The optimized price is returned to the CPQ system along with a breakdown of the pricing components (e.g., base price, discounts, additional fees).

Your CPQ then presents the final quote, including the optimized price, product configuration details, and any additional terms and conditions.

As always, the quote is formatted according to your company’s standards and branding guidelines.

Your sales rep reviews the generated quote for accuracy and completeness. If required, the quote may go through an approval process within the organization before being sent to the customer.

Step 5: The seller presents the price to the customer.

The final quote is then presented to the customer. The seller can discuss and negotiate further if needed, but the dynamic pricing engine has already optimized the price based on all relevant data and constraints.

If they reach an agreement, the rep can easily convert the quote into an order within CPQ, just like they would with any other quote.

Essential software integrations for dynamic pricing

Carrying out a pricing transformation by adding a dynamic pricing engine on top of your CPQ system is an exciting option. But you need to consider all the tools needed to achieve a seamless integration and maximize its value.

Let’s take a look at some of the essential software integrations for successful dynamic pricing management:

1. Enterprise resource planning (ERP)

ERP integration is crucial for dynamic pricing because ERP systems hold essential data such as product availability, cost structures, inventory levels, and production schedules.

integrating the two allows your CPQ system to:

  • Access up-to-date product costs and availability
  • Adjust prices based on inventory levels and production costs
  • Ensure that configured products can be delivered on time and at the quoted price

While your ERP might not handle order management directly, it’s also closely tied to that process. So, ERP integration facilitates a seamless handoff between sales, billing, and fulfillment (and accurate pricing/product info every step of the way).

2. Customer relationship management (CRM)

Integration with CRM systems provides comprehensive customer data, including purchase history, preferences, and past interactions. If helps your sales team personalize pricing based on the customer they’re working with and their history (if any) with your company.

Not to mention, as your customers move through the pipeline from one stage to the next, integrating CPQ and CRM makes tracking quotes and interactions a lot easier. When your dynamic pricing engine calculates a sale price, updates for activities like sending a quote or awaiting an approval, are fed directly to your CRM.

It also enhances the customer experience by enabling your reps to quickly generate personalized offers and streamline the sales process.

3. Business intelligence (BI) tools

BI tools enable your system to use analytics to make decisions and predict outcomes. You can also use them to visualize and test the impact of different pricing strategies or product inputs on sales and profitability.

From a price optimization standpoint, your BI tools also play a critical role in forecasting demand and setting optimal prices for the future.

4. Web-based portals

If you transact online, integrating your ecommerce platform with your CPQ and dynamic pricing engine is essential for providing accurate pricing to customers. That way, customers can guide themselves through the purchase process. As they select items, the dynamic pricing engine updates prices in real-time based on their inputs.

In industries like engineer-to-order manufacturing or IT services, you also want to consider vendor portal integrations. Systems like ConnectWise CPQ can calculate prices in real time based on what vendors are currently charging, and automatically pass updates to rep- and customer-facing systems.

5. Market data and competitor analysis tools

To work like it’s supposed to, your dynamic pricing engine needs a continuous data feed. While it can pull some sources of data on its own, it’s best to connect it to external data sources.

Depending on the nature of your business and offerins, this integration could be for things like:

  • Stock market prices
  • Commodity prices
  • Competitor pricing and promotions
  • Industry trends
  • Benchmarks

The more data your dynamic pricing engine has access to, the easier it is to adjust prices dynamically and remain competitive.

6. Contract lifecycle management (CLM)

While not specifically part of the dynamic pricing workflow, contracting is the process that follows a quote acceptance.

CLM systems need to sync with your pricing information to send accurate pricing terms and conditions to customers. And, during reviews, approval, and redlining, you need it to check contract terms and verify they align with pricing strategies.

Having dynamic pricing information connected to your CLM system also allows you to track the impact of different pricing strategies on customer lifetime value.

Dynamic pricing with CPQ improves sales performance.

Shifting prices in real-time guarantees you’re always able to reflect customers’ actual demand and willingness to pay for your product.

When the market is willing to pay more, raising prices to capitalize on that demand is more straightforward with dynamic pricing software. The same goes for when the market’s facing a downturn, and you need to reduce prices to offload your inventory and cut potential losses.

Your organization benefits tremendously from CPQ with dynamic pricing software:

  • Pricing accuracy and consistency. Agile CPQ systems adjust prices instantly, minimizing pricing errors and ensuring consistency across all sales channels — direct sales, ecommerce platforms, and distributors.
  • Increased sales efficiency and reduced quote time. Automated pricing calculations eliminate the need for manual adjustments. For instance, Dell’s pricing transformation using Vendavo CPQ has enabled the company to get 90% of its quotes finished, approved, and sent to the customer within 4 hours.
  • Higher margins and revenue figures. Dynamic pricing algorithms consider factors like demand fluctuations, cost changes, and competitive pricing. So, businesses can set prices that maximize profit margins while optimizing deal value for them and their customers.
  • Personalized buying experiences. By leveraging customer data from integrated CRM systems, businesses can offer tailored pricing and discounts to each customer in their pipeline.
  • Data-driven decision-making. The integration of dynamic pricing with CPQ provides granular insights into customer preferences, market dynamics, and sales performance. Real-time analytics and reporting tools embedded in CPQ systems support continuous improvement and strategic planning​.

And for customers, the #1 biggest frustration is waiting for response and turnaround (that is, if they’re willing to wait). Nearly three-quarters of buyers want a ‘rep-free’ buying experience, and CPQ with dynamic pricing the best way to deliver faster and more personalized quotes while eliminating points of friction in the sales process.

Best practices for using CPQ with a dynamic pricing engine

CPQ enables real-time pricing strategies in all kinds of industries — utilities, retail, ecommerce, travel, manufacturing, and even service-based industries like telecommunications. But the approach to setting dynamic prices varies wildly.

For example, Amazon changes its prices an average of once every 10 minutes. Flight prices fluctuate through a weekly or monthly cycle. And, dynamic pricing in healthcare means something entirely different for patient billing compared to insurance claims.

Implementing real-time pricing in your business requires careful planning and consideration. Here are some best practices to keep in mind when using CPQ with a dynamic pricing engine:

Understand your market and competition.

You have to physically analyze the same factors as your dynamic pricing software. Otherwise, you won’t know whether it’s making the right pricing decisions.

Set pricing rules that protect your margins.

There will come a point where you as a business cannot go any lower. Your system won’t know that unless you tell it so. AI-driven dynamic pricing algorithms can help improve your insights, but you need to establish the limits it should consider.

Regularly review your dynamic pricing strategy.

Customers sensitive to price changes may churn, while others may expect (or even appreciate) the dynamic adjustments. You’ll need to solicit customer feedback and test different price change cadences to get it right.

Develop clear policies and guidelines for your sales team.

Your reps should know when prices are acceptable and when they’re not. They must also know when to probe for more information from the customer or escalate a pricing request.

Create guardrails with guided selling and approval workflows.

CPQ systems with dynamic pricing engines let you create approval workflows for special pricing requests. When a seller’s quote hits that threshold, the system will route it for approval before sending to the customer. Even if they’re allowed to make adjustments to pricing on the flly, the system can set a fixed boundary to keep price changes within the negotiated parameters.

Guided selling also keeps sales reps in check. It prevents them from selecting incompatible products, which could throw off the pricing calculations.

Establish companywide data governance practices.

For reliable pricing data, you need clean, high-quality data sources and a process to manage that data. Work with your IT team to define data sources and establish regular updates and maintenance routines.

Train sales reps on dynamic pricing and segmentation strategies.

Your whole team should know your CPQ system like the back of their hand. They should recognize the times when a dynamic pricing adjustment is needed, and know how to make those changes without errors.

Transform your sales process with dynamic pricing

Dynamic pricing with CPQ is more than just setting the right price at the right time. It’s about transforming the entire sales process to meet customer expectations, improve efficiency, and maximize revenue.

In the future, AI, machine learning, and predictive analytics will continue to be more advanced within CPQ systems. At the same time, customers will expect personalized pricing that considers their individual needs and preferences.

So, there’s no better time than now to get ahead of the curve.

Looking for a CPQ with dynamic pricing? Check out my articles on selecting the right CPQ software and how to evaluate CPQ for SMB vs. enterprise needs. Also check out our CPQ product reviews.

CPQ Integrations