Upcoming Theory of Constraints Events

1st Quarter Group Mafia Offer Boot Camp
- January, 30, 31, Feb 1 2008 in Denver
- February 25, 26, 27 2008 in Denver
- March 24, 25, 26 2008 in Denver
- More information at http://www.mafiaoffers.com/

NEW REMOTE (on-line) Mafia Offer Boot Camp
- Done at your own pace and time of your choosing
- One on One support provided by phone conferencing
- More information at http://www.mafiaofferbootcamp.com/

PRIVATE Mafia Offer Boot Camp
- Done at your location and at a mutually convenient time
- More information at http://www.mafiaoffers.com/

NEW Theory of Constraint PRICING Project
- We usually do pricing projects as part of larger results based consulting engagements, but because they have been so successful (typically 10 to 20% return on sales), we have decided to offer stand alone pricing projects.
- If you have not yet gone through “Pricing using Theory of Constraints”, please see: http://drlisamaxprofit.blogspot.com/2007/05/pricing-using-theory-of-constraints.html
- More information at http://www.scienceofbusiness.com/Default.aspx?tabid=144

Goldratt CCPM Webcast starting February 13, 2008
- Watch Goldratt LIVE or rebroadcast.
- Dr Goldratt will be covering, never before released knowledge using the Strategy & Tactics tree.
- There are five 2.5 hour sessions. There are a number of options for viewing the webcast with pricing from $350 to $2500.
- More information at http://www.scienceofbusiness.com/Default.aspx?tabid=140

Executive Access Boot Camp
- Feb 28, 29, and March 1 2008 in Denver
- March 27, 28, 29 2008 in Denver
- More information at http://www.executiveaccessbootcamp.com/

SPECIAL: Free Shipping on the live recorded 3 hr workshop “Achieving a Viable Vision”, send an email to order for $99 (regularly $199). For more information: http://www.scienceofbusiness.com/Default.aspx?tabid=133

Pricing using Theory of Constraints – Q&A

I have not yet finished Blue Ocean Strategy. I will explain why when I post my review.

I have, however, received a pricing question and have written an answer. Enjoy.

Q: What about companies that have a market constraint and use S-DBR?

A: For companies that have a market constraint, I still recommend that they strategically place an internal limiting resource (control point) and use this strategic constraint to determine pricing and product mix.

We find that there is huge variation (+/- 50%) in pricing amongst and between competitors. So determining what is competitive is even a challenge. We use catalogs, industry studies, etc to help with this determination when those are available. Most of the time, we don’t have this information, so we use the technique we were all taught (TVCs + allocated OE + reasonable margin = price). We then ask our prospects/customers by how much did we miss the order or how far off was our closest competitor. Purchasers don’t typically tell us what the other prices were, but they will tell how by what % we missed it or got it.

How/when you modify pricing (in my opinion) depends on the type of offer you have. If you have an offer where you get premium pricing (like the Rapid Response mafia offer) you need to ensure that your standard price (at standard lead-time) is competitive because no one will pay a multiple of a price they perceive to be too high. We have had some situations with this offer where the standard price was not attractive to us (low T/CU) but we needed to offer this product to get the higher T/CU products. In that case we raise the price as much as we can but to still be considered competitive and then we also increase the standard lead-time. So, if we don’t like the price, but it is competitive, we increase the lead-time.

If we are dealing with a VMI type mafia offer than we typically start by matching the current pricing (assuming it is competitive a close to our target T/CU) then getting an increase after proof of concept. We have been successful at getting 2 to 12% increase.

When we consider increasing prices we take into account: T/CU of the product, total $T of the product, weighted average T/CU for the customers buying this product, and total $T for the customers buying this product. If we lose the sales of the product or sales of an entire client we need to understand by how much our T will go down.

Here's to maximizing YOUR profits!
"Dr Lisa" Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

P.S The next open to the public Maximizing Profitability event is Aug 28 in Denver, Colorado. This is a no charge half day event. To register go to http://www.viable-vision.com/

P.S.S The next mafia offer boot camp is August 29, 30, 31 in Denver or schedule a private one at your place, on your time frame! http://www.mafiaoffers.com/ We’re coming to New Zealand and Australia for boot camps in December!

P.S.S.S. Check out our new Theory of Constraints Pricing Project! http://www.scienceofbusiness.com/Default.aspx?tabid=144

Mafia Offer Podcast #1: http://www.podcasternews.com/programs/87/better-process-podcast/3574/?A=1

Purchase Dr Lisa’s book, Achieving a Viable Vision: http://www.scienceofbusiness.com/Default.aspx?tabid=133

Pricing Using Theory of Constraints Part 6 of 6

This is the final installment on Theory of Constraints pricing. At least for now. Goldratt's Theory of Constraints, The Goal, and Throughput Accounting don't address pricing specifially. So, I tried to summarize what we do with our clients. This pricing exercise has resulted in 10 to 20% increase in profits for our clients, so I would expect the same for you. So let's summarize what we covered about pricing.

• Part 1: We discussed the importance of and how to calculate the Throughput per Constraint Unit (T/CU) for each of your current products or services.
• Part 2: We discussed how to calculate a minimum T/CU which is like the minimum price you need to charge to cover your operating expenses and make a profit.
• Part 3: We then compared the T/CU we get for each product/service to the minimum T/CU we calculated.
• Part 4: Next we discussed how to handle products/services that are priced below the calculated minimum T/CU.
• Part 5: And finally we discussed how to handle products/services that are priced above or well above the calculated minimum T/CU.

With this additional information, I hope you can determine a price that 1) will help you to achieve your financial goals; 2) meet or exceed the value perceived by the market place (will customers buy at that price?); and 3) establish the position, brand and image you desire in your supply chain.

Here's to maximizing YOUR profits and setting your prices!

"Dr Lisa" Lang

P.S. Check out our new Theory of Constraints Pricing Project! http://www.scienceofbusiness.com/Default.aspx?tabid=144

(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

Pricing using Theory of Constraints Part 5

For the products that are well above the T/CU you need to look into the following things:
- what is your close rate on these items, is it low?
- have your customers/prospects told you that you were over priced?
- do you want more of this type of business?

The products that are slightly above the T/CU you calculated are probably fine. And some of them that are well above the T/CU are probably OK too. But the ones that you would like to sell more of, but are not, due to too high pricing, these are the ones you should consider lower the price on.

...to be continued...

Here's to maximizing YOUR profits!
"Dr Lisa" Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

Pricing using Theory of Constraints Part 4

Let's look at the products that are currently priced below the mininum T/CU that you calculated. You can have some products priced below your min T/CU because the weighted average just needs to be at the minimum. To determine if this is one that should be below the minimum or raised you need to take into account the following:
- where is the competition priced?
- does selling this product, help you to land higher T/CU products with the same customer?
- typically you have more than one of your constraint -- like have multiple printing presses. Does this particular product run on one of your more loaded ones or does it run on a less loaded one?

...to be continued...

Here's to maximizing YOUR profits!
"Dr Lisa" Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

Pricing using Theory of Constraints Part 3

Compare the minimum T/CU to the T/CU for each product. You will find current prices that are too low and too high relative to the min T/CU.

Now look at your quotes and calculate the T/CU for all your quotes. What is the T/CU for the ones your winning versus the ones your losing?

...to be continued...

Here's to maximizing YOUR profits!
"Dr Lisa" Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

Pricing using Theory of Constraints Part 2

Now that we have our current T/CU for each product/service we calculate the minimum T/CU we need to cover all of our Operating Expenses plus make the profit we want. Here's how we do that:

Min T/CU = (annual OE + annual profit) divided by annual available constraint units

Operating Expenses (OE) are all the costs that don't change when you sell just ONE more of your product/service. They are all the costs not captured in the TVCs (Truly Variable Costs) and typically include rents, utilities, selling/marketing, general admin, all labor including direct, maintenance, and warehousing expenses.

To start, you can use your current annual profit, then increase it to see where you need to price to meet your profit goals.

Constraints Units (CU) are the annual number of hours or minutes you have available. So you you work one shift then use the time from one shift times about 70% which takes breaks and other misc downtime.

Now you have 1) your current T/CU for each product (see Part 1) and 2) the minimum T/Cu you need for each product.

...to be continued...

Here's to maximizing YOUR profits!
"Dr Lisa" Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

Pricing using Theory of Constraints PART 1

Deciding on pricing for your products or services tends to consume a lot of time and can even be stressful. Typically we are looking for a price that 1) will help us to achieve our financial goals; 2) meet or exceed the value perceived by the market place (will customers buy at that price?); and 3) establish the position, brand and image you desire in your supply chain.

The Theory of Constraints approach to pricing adds a slightly different perspective. When we first start working with a client we calculate the Throughput per Constraint Unit (T/CU) for each product/service. Here's how you do that.

1) List each product or category of products. If you have custom products, then use product categories. If you sell the same products multiple times, then list the individual products.
2) Calculate the Throughput(T) for each where T is the selling price minus the truly variable costs (TVCs). Typical TVCs are raw materials, sales commission, outside services, and freight.
3) Estimate how much of the constraint each product uses, how many constraint units. This is typically a time measure.
4) Divide #2 by #3 and you have T/CU for each product e.g. Throughput $ per minute.

Do this and now you have some information about your current pricing.

To be continued ...

Here's to Maximizing YOUR Profits!
"Dr Lisa" Lang

P.S. Check out our new Theory of Constraints Pricing Project! http://www.scienceofbusiness.com/Default.aspx?tabid=144