Five Ways to Measure ROI for a CPQ Solution
Product configuration software, by definition, sounds like a great idea. What’s not to like? Accurate configurations, errorless pricing and automated quotation and proposal generation; who’s not going to want those things?
The fact is, business requires justification beyond “it’s a no-brainer!”
In its July 2016 report, Powering a Profitable Sales Organization: How CPQ Cuts Costs, Aberdeen cites four specific measurable advantages that best-in-class CPQ solution users enjoy over those that are not invested in the technology.[i]
- A five times greater year-over-year revenue growth rate
- A one-million-dollar savings in sales rep replacement costs over a 10-year span
- A fourfold net profit increase over five years
- Over twice as effective in minimizing the complexity of the quoting and proposal process by minimizing the people and functions involved
But, let’s get specific. Let’s take a quick look at some of the more tangible paybacks offered by a CPQ solution. These advantages are measurable to facilitate some meaningful quantification of the benefits enjoyed by the user company.
- Reduction of the initial inquiry-to-close interval – For the most part, the active selling process takes place between two events—qualifying a buyer and closing the deal with the buyer. This is where questions are asked, objections are handled and value is established. Anything that speeds this portion of the selling process is good.
The ability of the sales rep to handle an objection is vastly improved with the expert intelligence built into the CPQ solution engine. No calls to the home office, no getting back to the buyer with an answer next week, no “I’ll see if I can find out”—all of the answers are right there on the tablet or in the laptop and readily accessible to the rep and the buyer.
If your average sales cycle is running 10 days through this phase, imagine the effect of reducing that interval by 10, 20, 50 or even 70%! The order is placed this week, not next. The product is built and shipped a week sooner and the sale is involved a week sooner; that means cash is received sooner as well.
- Reduced pricing errors – Pricing errors have many negative effects. Even when they are caught, it means requoting your prospect and looking stupid.
Undetected, overpricing a product can mean a lost sale, while underpricing a product can mean selling the product at a loss. Even if you detect the error and manage to salvage the deal, you are usually going to have some doubled effort in the area of cost justification. Worse yet, if the customer figures out they’ve been highballed, the automatic suspicion is that it was intentional. Lots of damage control is required.
Quantifying this is unique to each case involved, but start with an assumed error rate of 10%. Use average deal size to apply your 10% factor. For requoted deals, assume that 10% of them are going to double the duration of the sales cycle. That 10% of your sales, 10% of your revenue and 10% of your quotes will pay for a CPQ solution pretty quickly.
- Cost of a configuration error – This number will be all over the place because the cost of what you are building or selling will vary greatly.
Pulling a unit off the production line is loaded with costs. Pulling it back from a customer site means building the whole thing over again, shipping it again and installing it again. It means rebuilding trust with your customer and redeeming your image as a provider of quality products. Even if you can field-modify the installed product to accommodate the needed fix, you still have a margin-killing expense with service technicians onsite at no charge.
Configuration errors can be much more costly than the examples cited above. Imagine installing a defective assembly in an airliner. Imagine if a medical testing device was not properly calibrated. One has to look no further than the steering wheel on their car to see an airbag. Is it defective on your vehicle? How much will it cost to replace every airbag installed?
- Reduced training time for sales – How long does it take for your company to bring a new sales rep online and make them self-sufficient? When you roll out a new product, how long does it take to get your sales force comfortable with selling the product? A sales rep that isn’t selling is costing money in the form of compensation and lost opportunity.
Reducing the training time for both new hires and new products means getting in front of more opportunities more quickly. A sales rep can’t pay their own way until they start selling. CPQ gets them there quicker. Much of the detailed information about a product, how the assorted options work together and in response to the customer requirements does not need to be learned or retained by the rep because CPQ handles those dependencies.
How long does product training take for your product lines? How much can that training time be reduced by putting the selection criteria into an AI-powered CPQ solution? Time to production and market access are the metrics to review in this phase of ROI measurement. For product rollouts, the amount of time that’s saved translates into how much quicker you are able to start taking orders.
- The cost of putting experts on the road – Product configuration software helps users save considerable amounts of money in the form of reduced travel and time spent by “experts” called into stalled sales cycles.
Consider the “Will it do this?” question posed by the customer. If the rep doesn’t know the answer, at minimum, they have to ring up your engineering group or product management to get an answer. In many cases, the rep will need to bring in a “corporate guru” to analyze the situation and provide an informed response to the query. That person is traveling and likely will be expected to pick up a lunch tab or even dinner. They will have hotel and air-travel bucks showing up on their expense reports, and they will also not be doing their normal job.
Building that knowledge into the CPQ solution reduces or eliminates those expenses. Look at your “expert” travel line associated with closing sales and see how much you are currently spending on this type of support. Your product configuration software should handle most of this.
ROI is computed in various ways for different companies. I’m not supplying a specific formula in this piece because you know your requirements in the area and I do not. However, this piece should show you where to find the dollars you are wanting to measure.
We will be taking a close look at ROI for a CPQ solution all month long on this blog. Check back next week for more information.