March 26 by Brion Schweers
On the 29th of January, 2018, Gartner released their Magic Quadrant for Configure, Price and Quote Application Suites. This report indicated that the Configure, Price, Quote (CPQ) software market in 2016 was approximately $878 million and was expected to grow at 20% per year through 2020. This estimated growth is consistent with the estimate they provided in the Market Guide for Configure, Price and Quote Application Suites published on 27 Oct 2016. That report also indicated that Cloud solutions will drive most of that growth. In this blog post we will explore 3 reasons why the CPQ market continues to expand and how the solution is evolving to meet this growing demand.
Reduction of Barriers to Entry for CPQ
The first reason the CPQ Market is expanding can be attributed to the reduction of barriers to entry enabled by the introduction of SaaS software. The reduced upfront costs associated with acquisition and deployment of Cloud CPQ software introduces new participants to the market. Companies that could not justify the costs associated with an on-premise solution can now see the value of a SaaS solution. This implies that enterprises with custom (or homegrown) systems are entering the CPQ market for the first time. It also suggests that companies with existing on-premise Configure, Price, Quote solutions are migrating to cloud-based solutions. Finally, customers that don’t have complex product configuration needs are also evaluating solutions. In this case they are more interested in the ability of a CPQ tool to manage complex pricing scenarios, handle price approvals and provide a consolidated quote document to their customers and prospects.
CPQ: From Sales Transactions to Sales Enablement
The second reason the Configure, Price, Quote market is growing is that modern solutions have evolved from Sales Transaction tools into Sales Enablement systems. In previous blog posts, I have written about configuring the deal and the role that machine learning and extensibility play in the future of CPQ. These types of capabilities have helped to evolve what was once a “Sales Configuration” tool into a modern sales enablement tool that empowers buyers and sellers to configure the deal. Omnichannel commerce enables companies to improve the way they communicate and interact with their customers. Buyers and sellers can both benefit from digital collaboration in all aspects of a commercial transaction.
Given that many B2B transactions are complex and involve multiple parties, a tool that supports product selection, solution configuration, price negotiation and quote presentment that can be deployed across multiple interfaces (e.g. CRM, eCommerce, Partner Portal ) is essential to the concept of configuring the deal. When you add the ability to leverage behavior mechanics that incent buyers and sellers to work together, machine learning to provide real-time intelligence and natural language processing to simplify the users’ ability to communicate with the application – you have truly created a sales enablement tool.
CPQ 3.0 – The Next Generation of Configure, Price, Quote
The third reason is ultimately the result of the first two. With lower barriers to entry and the need to empower buyers and sellers to configure the deal, the focus is no longer exclusively on complex product sales. As a result, several new use cases have emerged and new vertical industries are realizing the potential that Configure Price Quotes solutions provide. As we know the early adopters of CPQ were primarily Industrial Manufacturing and High-Tech companies and were soon followed by the Telco vertical. Today we see companies in many industries all embracing the need for CPQ: Communications, Energy, Financial Services, Manufacturing, High Tech and Life Sciences. But each have their own set of unique business challenges that have shaped what I call CPQ 3.0.
CPQ 3.0 refers to the 3rd generation of CPQ tool. If we accept that the first generation were the early sales configurators of the 1990’s, then the 2nd generation were CPQ tools of the 2000’s that began to combine Configure, Price and Quote into a single integrated solution. Interestingly, it was along this same timeframe that the SaaS model began to take shape. As a result, many of the remaining CPQ 2.0 solutions were also the first SaaS CPQ offerings. The 3rd generation of CPQ tools were developed from the ground up in the SaaS world. As a result, they were designed to solve problems that the SaaS market created. Simple examples of these types of features include:
• The need to indicate if an item is being sold with a one-time charge or on a subscription basis.
• If subscription based, what is the frequency of the recurring subscription fee as well as the duration of the subscription?
• The tool must have the ability to add, change, swap and renew the subscription.
• Is there a usage based fee above and beyond the subscription fee?
The addition of these types of capabilities began to open the door to the traditional subscription markets (e.g. insurance providers). The evolution of SaaS to XaaS meant that companies that sold products that historically did not require a sales configurator, now required a CPQ solution to configure the deal. Given that a subscription is a type of service, the next logical evolution was to leverage CPQ to sell services. The two most prevalent types of service products where CPQ is beginning to play a role are: Aftermarket Service; and Professional Services.
What is interesting is that as we evaluate the traditional CPQ company that sold complex products, we are discovering that many of them also offer one or more subscription products. They also typically provide some form of maintenance contracts to their customers and in many cases, the complex products they sell require some level of professional services to deploy. So, while we see the CPQ market expanding a result of new entrants, we also see the market expanding as existing CPQ customers find new reasons to deploy the tool into other areas of their business, where sales automation has not traditionally addressed their complex needs.