June 29 by Michael Dunne
If you ask any executive team about its top concern, a supermajority of them in all likelihood will say that it is figuring out ways to grow sales and increase profits – ideally at the same time. However, increasing both revenues and margins concurrently is a daunting undertaking. And doing so consistently requires very hard work.
In fact, the two aims can lead to decisions, policies and programs that end up working in opposition to each other. For instance, if not managed correctly, expenses for sales and marketing can eat into margins, while efforts to raise profitability can cut into investments necessary for funding growth.
Volatility in markets, increasing globalization and competition, changing buying practices (due to E-Commerce), commoditization and other major business trends are not exactly making life any easier for executives to strike the right balance and succeed.
However, there are three areas where achieving these dual aims is possible, enabling companies to generate profitable growth that exceeds internal expectations, typical growth trajectories, and, better yet, the performance of competitors. This powerful trilogy is mastering solution selling, pricing (achieving pricing excellence) and renewals (managing recurring revenues).
Quote-to-Cash application suites play a central role in helping enterprises dramatically raise their game in each area by automating and improving the process between a buyer’s intent to make a purchase and fulfillment on a transaction. Such suites should include applications for Configure Price Quote (CPQ), Contract Lifecycle Management (CLM), order management, billing, renewals, subscription management and more.
Below I explain the significance and value of solution selling, pricing excellence and renewals, as well as the contributions of Quote-to-Cash applications for each.
Benefits of Quote-to-Cash
1) Solutions Selling
In a nut shell, solution selling amounts to identifying a customer’s needs, and then presenting a product or set of products that decisively satisfies those needs. So a solution is being sold that consistently appeals to and influences certain types of customer to make a purchase.
Usually it’s a problem, or set of pain points, that provides the impetus for a customer to shop for a solution. However, there are those who plan ahead, looking to secure an advantage (enlightened companies willing to invest ahead in technology to disrupt a market). And then there is the impulse buyer, quite common in consumer goods.
Depending on the market, two general approaches are taken in presenting a “solution”:
1. A complex, configurable and/or custom product(s) is offered, like heavy equipment for a construction project.
2. A package of simpler items and services are bundled together, like in telecoms. An example would be selling to consumers say, a phone plan, plus internet, plus cable service, all encompassed in a subscription.
And of course, a blending of these two approaches is possible.
To use a Star Wars analogy, the Millennium Falcon represents the first approach, in having a complex vehicle altered to convey a certain “spice” more rapidly across star systems. The statement “I’ll take those two droids” fits the second approach, in having a bundle sell for specific requirements (in this case, automated labor for a moisture farm).
But personalization or mass customization is often necessary. This complicates matters, forcing firms to consider trade-offs between satisfying customers and managing costs for producing and selling solutions.
How Quote to Cash Helps Solution Selling
CPQ makes it possible to offer product variation and combinations of products, allowing companies to scale by selling solutions, as opposed to experiencing diseconomies of scale from handling customizations. Rules and constraints make it possible to vary options, components, subassemblies and intermediate assemblies of products, while support for engineering products can be done too. Similarly, bundles of different combinations of products and services and digital goods are easily managed within the CPQ system, allowing rapid changes to bundles that occur frequently in sectors which must “bundle or die” (like in communications, or information services).
With CPQ, errors are removed from selling processes, easy navigation of product portfolios becomes possible, and guidance on selling solutions and personalizing offers are efficiently communicated to selling channels such as inside sales, field sales, partners and webstores. In short, CPQ facilitates business strategies for adopting new selling models such as solution selling, subscription-based sales, bundling, and omni-channel sales.
Contract management helps remove friction and time associated with accessing, negotiating and approving agreements associated with solutions. Moreover, there are services often sold that require terms to be laid out in legally binding documents, there are regulated sectors where contracts are important (such as finance and healthcare), and there are companies that quote through contracts (again, as in finance). More will be said on this later, but pre-negotiated pricing for partners and specific industries (like healthcare) are typically referenced from contracts.
With order management, available inventory can be checked to confirm lead times. In manufacturing for instance, shorter lead times are a competitive advantage in winning sales. An embedded microcontroller manufacturer would see sales grow if it provided lead times of seven weeks versus the industry average of 13. More importantly, order management ensures all details are captured accurately, and that orders can be orchestrated across increasingly complex supply chains involving different logistics, production and fulfillment partners.
Taken together, CPQ, CLM and order management provides the desired “straight through processing” (as sought in the insurance industry) that improves selling effectiveness of account representatives and partners. At the same time, Quote-to-Cash suites lower selling costs, sales cycle times and errors as processes for selling solutions are automated and integrated, eliminating many manual steps.
In addition, the rise of advanced analytics and big data means that Quote-to-Cash suites now offer powerful tools that leverage machine learning, delivering prescriptive analytics to sales channels on product, bundling, cross-selling and upselling recommendations. Loads of data flows through Quote-to-Cash systems relevant to selling processes and revenue generating activities, including very granular details on customers, prospects, products of interest, propensity to buy, price realization and the such. Advanced algorithms can be applied to these data sets to yield insights and recommendations that help sales sell more effectively.
2) Pricing Excellence
Pricing exerts one of the biggest impacts on efforts to increase profitability. As the seminal McKinsey studies on pricing power showed over the years, if a company can make a 1% price increase stick, it can increase its operating profits by something like 8% to 10%. That is big.
But pricing practices done right also help revenue growth. A recent report Gartner, an IT industry research firm, found that revenue improvements ranging 2% to 4% are possible, “often due to better oversight of, and guidance for, discounting and revenue leakage.”
This is another discipline that sounds straightforward, but is more difficult in practice. That is, how do you identify the right prices that a market will bear, while getting all sales channels to actually secure the desired pricing?
Visibility into market dynamics is critical to determining all major factors influencing acceptance of pricing, profitability and demand. A balance needs to be struck. If you price too high, demand can get depressed, while price levels that are too low erode margins.
Analysis is not helped by the fact that markets have become increasingly more volatile and uncertain. Gray markets may exist, and all sorts of discounting can go on across different channels, either for negotiated sales, or to flush out inventory. I used to joke with executives by asking, “Do your customers know your pricing better than you?” Many indicated that the scenario was not so far from the truth.
Moreover, even when a “perfect” understanding of the market is attained, and pricing models and price lists satisfactorily defined, there is still the big issue of execution. Both internal sales organizations and partners have a penchant for not following pricing policies, and for discounting that upends pricing strategies, especially in considered or negotiated sales. With transactional sales, all sorts of discounting can occur in reaction to seasonality or softening demand.
How Quote-to-Cash Helps Pricing Excellence
The classic science fiction movie Metropolis said “The mediator between the head and the hand must be the heart.” When it comes to pricing excellence that drives profit and revenue growth, “There can be no understanding between the hand and the brain unless Quote-to-Cash acts as mediator.”
This means that with Quote-to-Cash, all selling and buying patterns are captured within the software suite. An organization can see all information concerning deals and transactions, to make efficient decisions on pricing based on superior insight, leading to more precise pricing definition. More importantly, all of this hard work can then be efficiently communicated to sellers, whether to internal sales or partners, with enforcement of pricing policies and discounting rules.
With CPQ, the “P” is important in managing the entire lifecycle of pricing. This means more than just having a list of items, SKUs and pricing, and then applying it to a quote.
This is serious business involving price setting, price execution and communication to sales channels and price administration in order to manage price models and price points. It is especially important as solution selling is adopted, and correct pricing and discounting rules are needed to support different configurations and bundles.
But there is also deal management, to provide pricing, discounting guidance and enforcement of practices in the field (or with partners). Also, there is contract management, needed for regulated industries and for referencing pre-negotiated pricing, say with Group Purchasing Organizations (GPOs) in the healthcare industry, or with partner networks.
Last but not least is analytics. First there is pricing analysis, which help businesses understand how sales and partners are following pricing policies, an ability that is still very hard to master today in many enterprises (with disparate tools and overreliance on spreadsheets). New advances in machine learning give companies the facility to gain insights on how to improve pricing, and then deliverer discounting guidance based on the best practices of the top ten percent of sellers. All of this leads to price optimization that is more transparent, accessible and effectively executed.
Renewals, as well as the cultivation of recurring revenues and repeat business, merits significant attention. Deepening a relationship with an existing customer is much easier than acquiring a net new client. Multipliers of 3X to 5X have been put out there over the years on the cost of winning a new customer versus working with an existing one.
Underpinning these estimates are the benefits of name recognition, reputation and brand, as well as familiarity on the part of the seller with how clients do business. In addition, time and calories involved with acquisition and discovery are reduced, if not eliminated. And time equals money in sales.
Then there is the fact that for in most industries, more than 50% of clientele are existing customers, or repeat buyers. And for many mature sectors, there is diminishing opportunity with winning net new customers.
As a result, the subscription economy has emerged as a major trend, as more predictable revenues streams can be expanded through cross-selling and upselling during renewal. If subscriptions are multi-year, then relationships are made more stable making it harder for a competitor to steal a client.
Despite two decades of investment in Customer Relationship Management systems, enterprises of all sizes still encounter difficulties in gaining visibility into what customers have purchased. Similarly, enormous blind spots remain in keeping on top of renewals and ensuring subscriptions don’t run out. It is still quite common to hear a sales representative sound surprised in staff meetings when prodded about impending end dates for agreements that he or she overlooked.
Finally, it remains a serious challenge for sellers to propose additional products within an enterprise’s catalog that they lack familiarity or comfort with – this is especially the case when sellers are partners not beholden to the supplier. So, quick wins of gained incremental revenue, from adding relevant products to renewals, get missed.
How Quote-to-Cash Helps Renewals
CPQ, with Asset-Based Ordering, provides the means to cross reference what has been purchased with what can be sold. So Asset-Based Ordering functionality should provide a full account of all purchases by a client, as well as enable a new quote or order to be generated that includes previously purchased items. CPQ systems should save “favorite configurations” that clients had defined in the past deals, as well as cross reference purchased products with a catalog management system to identify new product introductions and sunsetted products. Recommendations can then be given during the renewal process on product substitutions, cross-selling and upselling.
CLM, integrated with Billing and CRM systems, provides the advanced notifications and alerts on expiration dates, enabling more proactive measures in ensuring renewals receive appropriate attention. Just as voting early and often helped win elections in Chicago, early engagement with customers leads to higher renewal rates, and larger renewals.
With channel shifting, purchases may initially be made in person, but then reordered or replenished online. Therefore, support for E-Commerce webstores is critical, especially because of the lowering selling costs involved, which can be reduced by as much as 80% according to Forrester (electrons are cheaper than an agent in a call center, and faster). Also, as more and more people prefer to research products and buy online, E-Commerce improves the ease of doing business with a company.
Finally, analytics leveraging machine learning have opened up enormous opportunities for customer data, purchasing patterns, and trends in renewals to provide data-driven guidance on bundles and products. Such advanced prescriptive analytics help sellers identify and sell items in catalogs that they have less familiarity with, which is a big win for companies with enormous and/or dynamic product portfolios, or recent growth through acquisition.
In Summary: Making it Real, with a Real World Example
When done right, customers buy more, often buy more profitable items, and provide repeat business that costs a lot less to win. Taken together, such trends lead to elevated revenue growth, and more profitable growth at that.
But let’s make this real, and take the example of getting new glasses. When buying glasses, I have an expectation of spending about $400 to $500. However, nowadays there is quite a selection of nice looking frames, some with premium brand sounding names. In addition, there are new, high index lenses that are thinner and more appealing, which I would gladly pay an additional $125 for. The same goes for UV protection and scratch resistance, adding another $149 to the total price. When done, the solution to my eyewear needs came to $578, $78 more than planned, but I still leave a satisfied customer, with my issues with poor eyesight and old glasses resolved.