CPQ dynamic pricing capabilities allow companies to adjust quotes in real-time through their Configure-Price-Quote systems, enabling optimal sales strategies in response to market changes. In this comprehensive guide, we’ll explore what dynamic pricing is, when to use it, the benefits of combining CPQ systems with dynamic pricing, the common types of dynamic pricing strategies, and how to implement and best utilize dynamic pricing through CPQ software.
What is dynamic pricing?
Dynamic pricing, sometimes called surge pricing or time-based pricing, is a pricing strategy in which businesses set flexible cost estimations for products or services based on current market demand. It usually entails raising cost estimations during periods of peak demand and lowering quotes during periods of low demand. The classic example is an airline or hotel charging higher rates during holidays or big events and offering discounts in off-peak times.
When to use dynamic pricing
Dynamic pricing isn’t appropriate for every situation, but it shines in specific scenarios where flexibility can lead to better outcomes. Here are some common situations when businesses should consider using dynamic pricing strategies:
High-demand periods
One of the clearest opportunities for dynamic pricing is during surges in demand. When market demand spikes – for example, during a product’s viral moment or a sudden trend – businesses can raise cost estimations to capitalize on the willingness of customers to pay more. According to the principles of dynamic pricing, companies adjust cost estimations to reflect peak demand, ensuring supply constraints are managed by higher quotes while maximizing revenue. For instance, ride-sharing services like Uber famously implement surge pricing when ride requests outnumber drivers available. By using dynamic quoting in high-demand periods, a business can balance supply and demand: higher quotes can moderate excessive demand and allocate resources (or inventory) to the customers who value the product most, all while increasing profit per sale.
Seasonal sales and events
Seasonal fluctuations and special events are prime times to leverage dynamic costing. Many industries experience predictable seasonal patterns – think of retailers during Black Friday, or travel and hospitality sectors during holidays and tourist seasons. Dynamic quoting allows quotes to be fluid during these times. Event-based quoting is another angle: cost estimations can be adjusted ahead of a big concert, sports championship, or festival when local demand for certain services (like hotels, ride shares, or even merchandise) jumps. By tying quoting to seasonal demand and events, companies ensure they’re not leaving money on the table during boom times and can still attract customers during slower times by offering better deals.
Competitive market analysis
Dynamic quoting can be used to respond to competitors in real time. Competition-based quoting is a strategy where a company monitors competitors’ cost estimations and adjusts its own cost estimations to maintain an edge. For example, if a major competitor slashes quotes for a flash sale, a retailer using dynamic quoting might quickly lower its own quotes to avoid losing market share. By using a CPQ software integrated with market data, businesses can automate this process: the system could pull in competitor quoting data and suggest quote adjustments to the sales team or even directly to an e-commerce storefront. This real-time competitive analysis ensures your quoting strategy is not static while rivals change theirs. It helps a company remain competitive, attract customers with better offers when needed, or protect margins when it has a unique advantage.
Customer segmentation and personalization
Not all customers are the same – and real-time rating can take advantage of that by tailoring cost estimations to different customer segments or even individuals. Segmented real-time rating means offering different quotes for the same product to different groups based on their characteristics, purchase history, or behavior. For example, loyal customers or subscribers might receive special discounted quoting as a reward, while first-time buyers see standard quoting. CPQ software can enable this by pulling in customer data from CRM: if a returning corporate client with a large account is configuring a quote, the CPQ system might automatically apply a volume discount or preferred rate. Personalization through real-time rating can significantly enhance the customer experience – buyers feel like the offers are tailored specifically for them. For instance, an online store could recognize a shopper’s segment (location, loyalty status, etc.) and adjust quoting or apply a targeted promotion in real time. Amazon and other e-commerce companies often use segmented and personalized quoting strategies (or personalized discounts) based on user data. The key is to use segmentation carefully and transparently to avoid alienating customers; the goal is to align cost estimations with the value each segment expects, making the buying process feel customized and fair for each customer group.
Price optimization for new product launches
Launching a new product comes with uncertainty – it’s hard to know the perfect quote point from day one. Dynamic quoting can be a powerful tool during a new product launch to optimize quoting as you gather market data. Rather than setting a static quote and hoping it’s right, companies can use real-time rating strategies to adjust introductory cost estimations and find the sweet spot of market acceptance and profit. Alternatively, if early sales data shows customers are willing to pay more than initially thought, the quote can be raised to maximize revenue. This ongoing adjustment is essentially an experiment in real time. As L.E.K. Consulting notes, real-time rating is an extension of quote experimentation – it allows ongoing use of data and market signals to adjust quoting and maximize overall profitability. Think of how ride-sharing or ticket platforms adjust quotes even for new offerings on the fly based on demand signals; similarly, a business launching a product can adjust quoting weekly or even daily in the early phase. In summary, real-time rating during a launch enables a company to optimize quotes as data comes in, rather than guessing upfront, preventing lost revenue from quoting too low or lost sales from quoting too high.
Benefits of CPQ in Dynamic Pricing
Combining real-time rating strategies with a CPQ system yields significant benefits. A modern CPQ software not only automates the quote generation but also integrates complex pricing rules and real-time adjustments, making real-time rating feasible and efficient at scale. Here are the key benefits of using CPQ in dynamic pricing:
Streamlined pricing processes
Integrating real-time rating into a CPQ platform streamlines the entire costing process. The result is a smoother sales process where quotes are generated faster and with consistent application of costing policies. Overall, CPQ-driven automation brings efficiency and consistency, allowing the sales team to focus on selling rather than calculating, and ensuring the costing process can handle complexity (tiered costing, bundles, special customer terms) with ease.
Improved pricing accuracy
Dynamic pricing with CPQ significantly improves pricing accuracy and consistency across all channels. Human error in costing – quoting the wrong quote, forgetting a discount, or misapplying a surcharge – can be costly. A CPQ system enforces costing rules and uses real-time data to calculate the correct quote every time, ensuring that every quote reflects the latest approved costing strategy. Agile CPQ systems can adjust quotes instantly as conditions change, minimizing costing errors and guaranteeing that the quote a customer sees is accurate and up-to-date. Ultimately, CPQ-enabled dynamic costing ensures the company adheres to its costing policies exactly, even as those policies evolve dynamically.
Enhanced customer experience
Because dynamic costing can incorporate customer-specific terms (like negotiated discounts or loyalty costing) through the CPQ’s rules, the quote the customer receives feels custom-built for them, which improves satisfaction. Integration with CRM via CPQ means a sales rep has all the customer’s history and preferences, and the system can tailor the quote accordingly (for instance, automatically giving a volume discount if the customer usually buys in bulk).
Faster quote-to-cash cycle
Speed is critical in sales. By using CPQ software with dynamic costing, companies can accelerate their quote-to-cash cycle – the process from quoting a customer to closing the deal and getting paid. With streamlined processes and accurate costing (as discussed above), quotes go out faster, and deals can be closed without the delays caused by pricing approval bottlenecks or revisions. One notable example is Dell’s pricing transformation using a CPQ solution: they managed to get 90% of quotes finished, approved, and sent to the customer within 4 hours, dramatically shortening what used to take days. The team becomes more productive and can respond in near real-time to inquiries. In competitive sales situations (like bidding for a client’s business), having a lightning-fast turnaround on a complex customized quote can impress the client and give a competitive edge. In summary, CPQ and dynamic pricing remove friction from the quoting process, enabling a much faster transition from initial interest to final sale, thus shrinking the quote-to-cash timeline significantly.
Real-time market adaptation
Markets can change in an instant, and businesses that can adapt their cost estimations in real time have a distinct advantage. This real-time market adaptation is crucial in industries with quote volatility.
Increased revenue and profit margins
The data collected through CPQ quoting can highlight which products or segments yield the best profitability, informing strategy. In sum, CPQ-enabled dynamic pricing drives increased revenue by capturing value in high-demand moments and drives higher profit margins by intelligent pricing CPQ with willingness to pay and cost factors across all sales.
Most Common Types of Dynamic Pricing
Dynamic pricing isn’t a single tactic but a family of strategies. Depending on the business model and goals, companies can use different types of dynamic pricing to meet their objectives. Here are the most common types of dynamic pricing:
Demand-based pricing
Demand-based pricing is perhaps the core idea people think of with dynamic pricing. In this strategy, cost estimations go up when demand is high and go down when demand is low. It’s all about what the market is willing to pay at a given time.
Time-based pricing
Time-based pricing adjusts cost estimations according to the time of day, day of week, or season, regardless of direct demand signals. It recognizes that value and demand often correlate with timing. For example, electricity providers often charge higher rates during peak hours (daytime when usage is high) and cheaper rates late at night when usage drops – encouraging consumers to shift some usage to off-peak times.
Segmented pricing
Segmented pricing (also known as customer-based pricing) involves setting different quotes for the same product or service for different customer groups or segments. The segmentation can be based on various factors: customer type (e.g., retail customer vs. wholesale buyer), demographics (student, senior, military), loyalty status (new customer vs. returning loyal customer), or even geographic region.
Location-based pricing
Location-based pricing is a strategy where quotes are adjusted depending on the geographic location of the buyer or the sale. Markets in different regions have different characteristics – customer purchasing power, local demand, competition, and cost structures can all vary by location. Dynamic pricing by location recognizes these differences. For instance, a software company might charge differently in developing countries compared to developed countries, aligning with local income levels and competition.
Competition-based pricing
Competition-based dynamic pricing centers on continually reacting to competitors’ pricing moves. Instead of pricing primarily by internal costs or demand, the company lets the market set the baseline: you quote below, at, or above competitors depending on your strategy, and you adjust whenever they change their quotes.
How to Implement Dynamic Pricing Using CPQ
Implementing dynamic pricing in your business is a structured process, and doing it through a CPQ system can make it far more manageable and effective. Here’s a step-by-step approach to rolling out real-time rating using CPQ:
Define pricing objectives and strategies
Start by clearly defining your pricing objectives and overall strategy. What are you trying to achieve with dynamic pricing? Are you aiming to maximize revenue, improve profit margins, increase market share, sell off excess inventory, or some combination of these goals? Having specific objectives will guide all other decisions.
Integrate CPQ with relevant data sources
Dynamic pricing is data-driven. To successfully implement it, your CPQ software must be integrated with all relevant data sources that inform pricing decisions. This usually includes both internal systems and external feeds. Internally, integrating with your ERP system is vital because the ERP holds information like product costs, inventory levels, and production schedules.
Set up pricing rules and algorithms
With your strategy defined and data pipelines in place, the next step is to configure the CPQ system with the pricing rules and algorithms that will execute your dynamic pricing. This involves translating your pricing strategy into the logic that the software will use when generating cost estimations.
Test and validate pricing scenarios
Before rolling out a real-time rating company-wide or to real customers, it’s crucial to test and validate the quoting engine in your CPQ system. Dynamic quoting adds complexity, and you want to ensure the outcomes align with expectations and there are no unintended consequences.
Train sales teams on the new system
Introducing dynamic quoting through Configure-Price-Quote will likely change how your sales team operates day-to-day, so thorough training is essential. Even the best quoting system can falter if the people using it don’t understand or trust it. Begin by explaining the concept and the process to the sales team: why the company is adopting dynamic quoting, how it benefits them, and what it means for their interactions with customers. Salespeople need to know the CPQ system’s capabilities and how to use its features for quoting. Training should cover how to configure a quote in the CPQ, how to see or select quoting options, and how to handle any overrides or approvals.
Monitor performance and refine pricing strategies
Implementing dynamic quoting is not a one-and-done project – it requires ongoing monitoring and refinement. After the system is live, you need to keep a close eye on how the dynamic quoting strategies are performing against your objectives.
Best practices for using CPQ with dynamic pricing
To fully leverage CPQ and dynamic quoting, consider these best practices. They will help ensure you get the most out of your system and strategy:
Integrate CPQ with real-time data sources
For dynamic quoting to truly be dynamic, it needs fresh data. Make sure your CPQ system is integrated with real-time or frequently updated data sources. This includes internal data (like inventory levels, cost updates, and sales trends) and external data (like competitor cost estimations, market rates, or indices relevant to your industry).
Leverage AI for pricing optimization
Artificial intelligence and machine learning can supercharge your dynamic pricing efforts. While rule-based pricing is effective, AI can detect complex patterns and continuously improve pricing decisions beyond simple if-then rules. Consider leveraging AI modules or pricing optimization tools within or alongside your CPQ system. These AI tools can analyze historical sales data, customer behavior, and external factors to suggest optimal cost estimations or adjustments.
Customize rules for different market segments
Not all products or markets should follow the exact same dynamic pricing rules. One best practice is to customize your CPQ pricing rules for different market segments or product categories. Segmenting your approach allows more precision. For example, you might have a set of rules for high-volume, low-margin products (where even small quote changes can have big volume effects) and a different set for high-end, high-margin products (where quote stability might be more important for brand image). Or you might differentiate between new customer pricing strategies and existing customer upsell strategies. The idea is to avoid a one-size-fits-all dynamic model.
Ensure scalability for complex product configurations
If your products or services involve complex configurations (common in B2B industries like manufacturing, software, telecommunications, etc.), make sure your CPQ and dynamic pricing setup is scalable and performant as complexity grows. Scalability here means two things: handling the volume of configurations and cost estimations quickly, and managing the complexity of pricing rules without slowing down or becoming unmanageable.
Train sales teams on CPQ tools and features
Just as training was vital during implementation, ongoing training and education on the CPQ’s tools and features is a best practice for continued success. Your sales team may not need to know the intricate details of every pricing algorithm, but they should be comfortable with the CPQ interface and aware of features that help them sell.
Monitor and adjust pricing strategies continuously
Continuous improvement is key to long-term success with CPQ and dynamic pricing. As a best practice, never set your dynamic pricing rules and then ignore them. Market conditions, business goals, and product offerings change, and your pricing strategy should evolve too. Use the analytics at your disposal to monitor how well your dynamic pricing is performing.
Why Choose CanvasLogic for CPQ Solutions?
Implementing CPQ with dynamic pricing can be complex, and choosing the right solution partner is crucial. CanvasLogic offers a robust CPQ platform that stands out for businesses looking to embrace dynamic quoting and sophisticated product configuration.
CanvasLogic CPQ is an ideal choice for companies aiming to implement dynamic quoting effectively. It combines a powerful quoting engine, ease of use, integration readiness, and the ability to handle complex product and quoting scenarios.
Conclusion
In conclusion, embracing CPQ and dynamic quoting is about enabling your business to be more responsive, data-driven, and customer-centric in its quoting approach. With careful implementation and the support of a capable CPQ system, dynamic quoting offers a path to optimal sales outcomes: customers get fair, timely quotes, and businesses achieve optimal revenue. It’s a win-win strategy for the digital age of sales. By following the guidance in this comprehensive guide, your organization can begin reaping the rewards of a modern, dynamic approach to quoting.
