Emilia Dunaj
Emilia Dunaj
Head of Technology Insights
May 2024, 11 min. read

When you’re a large business offering configure-to-order products, managing your prices is a challenge. It takes careful analysis and precise strategies to balance profit with complex scenarios that account for customer value. Many businesses seem to know exactly how to price their products quickly to maximize profit without scaring away customers. That’s because they use Configure-Price-Quote (CPQ) systems with advanced CPQ price rules.

CPQ systems are modern digital sales software that offer flexibility in product configuration, automate the sales process, and ensure consistent pricing across the board. They help to deliver accurate quotes instantly to help you win valuable deals. Particularly with customers carefully balancing the performance your product offers against its investment cost.

But what exactly are these price rules within custom CPQ software, and why are they so important? 

In this article, we’ll delve into the different types of CPQ pricing rules and explore their impact on businesses. By the end, you’ll understand why investing in this sales system is the right move for your company.

Let’s dive in!

What are CPQ price rules?

CPQ software is designed to simplify complex pricing decisions. A key part of this software is the price rules. CPQ price rules are basically like a set of instructions telling the system how to determine the best price for a product or service.

They determine how much a customer should pay based on various factors. These factors can be straightforward, like the cost of production, or more complex, like market trends or customer-specific agreements.

If you’re selling complex products, each of your dealers or customers has different needs, and every product you offer can be customized. If you had to manually price each order, it could take hours, if not days, and leave room for error. Pricing engines within your CPQ system automate this process, ensuring accuracy and consistency. 

Pricing rules example diagram

But that’s not all. Price rules are crucial for strategic pricing management. They allow you to apply special prices for loyalty programs, offer discounts for bulk purchases, and any customer-specific pricing conditions. If a customer has a unique contract or volume-based agreement, the CPQ system can automatically apply the agreed-upon rates without manual intervention.

Additionally, effective CPQs allow businesses to adjust their prices quickly to stay competitive. Having all prices in one central hub enables for easy, quick updates so all your sales teams and partners have accurate prices. 

Key components of CPQ price rules

CPQ price rules drive pricing decisions in Configure-Price-Quote software. But what makes them tick? To understand how CPQ systems set prices, let’s break down the key pricing components:

  • Criteria are the starting point. They define when a price rule should be applied. For example, you might set a rule that applies only when a specific product is configured in a certain way. Criteria can also include customer-related factors, like their location or purchase history.
  • Actions determine what happens when the criteria are met. This is where the price changes occur. A price action could be an applied discount, price adjustment, or fixed markup. For instance, if the criteria are met for a bulk order, the action might be putting on a 10% discount.
  • Conditions are additional checks or filtering that must be true for the price rule to work. A common condition could be checking if the product is in stock before applying a discount. If it’s not in stock, the rule doesn’t apply.
CPQ price rules diagram

A recent global survey of 1,700 B2B companies revealed that 85% of C-level respondents believe there is room to improve their pricing decisions. By integrating criteria, actions, and conditions, CPQ systems empower businesses to establish prices based on a variety of factors while maintaining control over the entire pricing process. This level of flexibility is what makes custom-developed CPQ systems incredibly valuable for companies facing complex pricing challenges.

6 Key types of CPQ price rules

If you’re a user clicking options, selecting features, and entering data into fields in a product configurator, various types of rules take your input and determine the final price. Then, further rules ensure the quotes are always accurate and consistent. Here’s a breakdown of the six key CPQ price rules that govern how quotes are generated when users interact with the system’s UI. 

1. Standard pricing rules

Standard price rules use simple, consistent calculations to determine pricing. These price calculations are ideal for products with stable costs or predictable pricing structures. 

One example of a standard price rule is fixed markup. This method involves adding a set percentage to the cost of a product to determine the selling price. For example, a manufacturing company might add a 20% markup to the cost of production. If producing a piece of equipment costs €100, the selling price would be €120.

The list price rule is another common approach. This rule sets a predefined price for each product. The list price is like a baseline, where every customer starts with the same price. Then, at the quoting stage, other rules, such as discounts or additional charges, can be applied based on specific conditions. 

What’s the advantage of standard price rules? They are easy to understand and implement. With a fixed markup, you always know your profit margin. With a list price, you have a clear starting point for customer negotiations.

2. Variable pricing rules

Variable price model offers more flexibility than the standard pricing one. To understand this approach, let’s consider the variable pricing definition: it involves adjusting prices based on changing factors, such as production costs or market conditions. Introducing these rules is especially valuable for businesses that operate in dynamic industries. 

One of the variable pricing examples is a cost-based pricing rule, which ties the selling price to the cost of manufacturing. It’s a simple formula: take the production cost and add a markup. However, unlike fixed markup, this method can adjust to changes in production costs. For example, if the cost to produce a component increases from €50 to €60, the CPQ system can automatically adjust the selling price to maintain the desired markup.

3. Promotion and discount rules

Promotion and discount rules help companies attract customers by offering reduced prices in specific situations. These rules are common for many businesses, as they help to attract new customers, encourage repeat business, and drive larger orders. 

For example, introducing tiered pricing rules allows manufacturers to set different price levels based on quantity thresholds. As customers order more, they move into a higher discount bracket. This strategy encourages larger purchases and gives customers an incentive to buy in greater volume.

Bundle pricing involves offering discounts when customers purchase related products together. It’s another effective tactic to encourage customers to buy more. Here’s how it works: product configurator rules within your CPQ automatically suggest additional related products to complement your customer choices and increase order value. The system helps to drive additional sales while giving the customer a good deal on a complete solution.

Bundling items that are typically bought together is a smart move in many cases. Quite often, customers focus solely on the bundle’s price without noticing changes in the individual items’ prices. In fact, a permanent 1%  reduction in the price of a main product in a bundle can lead to an increase of approximately 1-9% in the total units sold of that item.

4. Customer-based pricing rules

Customer-based pricing rules derive from information about your clients, often pulled from a Customer Relationship Management (CRM) system or similar databases. These rules allow you to tailor prices according to individual customer profiles, contract terms, and purchasing behavior, providing a more personalized pricing approach.

Contract-based discounts are often used in B2B environments. Manufacturers offer special pricing for clients with long-term contracts or those who commit to a minimum order volume over time. This approach fosters stronger relationships with key clients and provides stability in revenue.

Value-based pricing takes a different approach by setting prices based on perceived customer value. This method works well when you offer unique features or customization. If a product has high-value features, the price can reflect that. 

5. Market-specific pricing strategies

Advanced pricing strategies go beyond the basics. These strategies use a mix of data analysis, market trends, and customer conditions to determine the best pricing approach. 

Geographic pricing rules adjust prices based on regional factors like currency exchange rates, local market demand, or shipping costs. Quite often products are priced differently in Europe, compared to the United States, due to varying shipping costs or market conditions. Geographic pricing helps ensure competitiveness in various markets.

Dynamic pricing algorithms use real-time data to set prices that can change based on demand, supply, or other factors. This strategy is commonly used in industries where prices fluctuate quickly. For example, a manufacturer might adjust prices based on the availability of raw materials and current demand. In a CPQ context, dynamic pricing allows you to respond quickly to market changes and optimize pricing for maximum profit.

Additionally, competitive pricing helps you stay in the game by considering industry trends. With this rule, the CPQ system monitors competitor prices and adjusts yours accordingly. For instance, if a rival company lowers their prices, your CPQ system can trigger a corresponding reduction to keep you competitive.

6. Custom price rules

Custom price rules are designed to meet the unique needs of B2B companies with complex product configurations and pricing models. Unlike simple quoting solutions, these rules are often developed by companies to fit their specific business strategies, allowing for a higher level of customization.

In B2B environments, products often have multiple variants with various features and customizations. Custom price rules give CPQ systems the flexibility to calculate pricing based on these unique configurations. This ensures that the final quote reflects the exact product specifications and value.

Additionally, custom price rules allow companies to implement pricing strategies that would be challenging with off-the-shelf pricing and quoting solutions. Because these rules are individually developed, they can seamlessly integrate with your company’s existing pricing model. This integration allows you to manage complex pricing scenarios efficiently and consistently.

CPQ Price Rules Types graph

How CPQ systems help with advanced pricing strategies

If you’re still using spreadsheets to manage complex CPQ price rules, you know how quickly things can go wrong. A simple mistake can throw off your entire pricing strategy. 

Or maybe you’re relying on a limited online solution, but when you test a pricing scenario, the results aren’t what you expected. Did you build the rule correctly? Did you account for all evaluation events, conditions, and actions? It’s hard to tell. Even if a rule seems to work, another one might override it, changing the final price without warning.

This kind of uncertainty can be frustrating and costly. That’s where a custom-built CPQ system makes all the difference. This type of solution is designed specifically for your business and your client’s needs, ensuring you have complete control and visibility over your pricing rules. It takes the guesswork out of pricing, allowing you to focus on building relationships and growing your business. 

CPQ systems bring multiple benefits to your business, especially if you’re dealing with complex pricing scenarios and advanced strategies. Here are some of the key advantages:

  • Managing complexity
  • Automated pricing decisions for every configurator selection
  • Dynamic pricing
  • Automatic margin control
  • Efficient sales processes
  • Quick, consistent, and accurate quotes
  • Easy to adapt to changing business and market needs
  • Improved customer experience

With a well-designed CPQ system, you have the flexibility and reliability you need to stay ahead in your industry.

📢 Learn more: Excel vs CPQ Quoting Software. How To Close Deals Faster if You Sell Complex Products?

Conclusion

If you’re looking to improve your pricing strategy and gain a competitive edge, a Configure-Price-Quote system is a smart investment. CPQs are designed to handle the complexity of pricing in large businesses. They automate the pricing process, reduce errors, and improve efficiency, allowing sales teams to focus on building customer relationships. 

Moreover, CPQ software further harnesses the power of pricing rules, automating and streamlining the quote-to-cash process with precision and consistency.

But it will only work if you get the pricing rules right. These rules provide a structured way to set prices, ensuring accuracy and flexibility. They allow companies to adapt to market changes, meet customer needs, and maintain profitability.

Therefore, choosing the right partner to build your CPQ system is a critical decision. Look for a software development company that has experience in designing custom product configurators and CPQ systems and understands the complexities of the sales process in your industry.  

Ready to transition your existing manual pricing strategy into custom CPQ software? Contact Right Information today to speak about the best options for your business model.