“Customers will Never Agree to Pay More” … Really?

Community Spotlight:

“Customers will Never Agree to Pay More” … Really?

One of the most valuable features of the Harmony Decision Maker is the Community Library. This is where our 10,000+ users from around the world can share the analysis and implementation status of how they resolved a “dark cloud” – a difficult decision they faced – in their personal life or at work. Users can share their decisions anonymously or with their name. “Sharing really is caring”. By sharing your analysis with others, you help users in two important ways.

Firstly, they realize they are not alone. In our real life (not the “best life” version we share on social media) we all face “dark clouds.” Sharing how you have analyzed and evaporated your dark cloud can give someone else hope.

Secondly, by sharing, we can learn from each other. Not just learn from each other’s successes, but also from our past failures. We all sometimes procrastinate in making good changes or choices or over-react and make bad changes or choices that we regret later. By sharing, you can help someone else avoid such mistakes.

Every month we feature a different user example. To see more, you can download the free Harmony Decision Maker and check out the community library.

The Problem

John’s Story

*John is Managing Director of the largest plastics sheet manufactures in South Africa, supplying the refrigeration automotive, building security and display industries with sheet product. Since its formation in 1973, the company has offered a competitive local alternative to all imported sheeting. They were the first in South Africa to successfully manufacture flat and profile polycarbonate and twin wall polypropylene sheet and one of the first in their industry to be awarded the prestigious ISO 9002 certification. Their “Quality first” commitment and investment in a high-tech laboratory to ensure they always meet the stringent quality specifications of their customers has given them a competitive advantage over the years. You can see that customers really appreciate this commitment when you walk into the reception area at their factory in Johannesburg; there are rows and rows of “Best Supplier of the Year” awards on the walls.  

John is extremely proud of the preferred supplier status they have build up over many years with  their customers. Customers know that the company delivers quality products on-time-in-full and whenever they have an emergency, will do whatever they can to help them out  – even if it means working overtime or over weekends. 

But recently, John is not getting much sleep. The company is in real trouble. Despite the Preferred Supplier Status and the many “Best Supplier of the Year”  awards, they are barely breaking even. At the last board meeting, his fellow shareholders have given him an ultimatum – get the company back to profitability or step down as Managing Director. His shareholders blame him for the poor profitability because he convinced them that investing in the high-tech lab and additional staffing would increase their sales. But it did not happen. Now he is stuck which increased costs and debt and with cheaper imports as an alternative, existing customers will never accept a higher price tag for the additional lab services and better service they offer. 

Really? Customers will never agree?

The Analysis

Step 1: My Problem – and Why it’s Important to Resolve

MY PROBLEM:

My Problem: What is the problem or “dark cloud” you are facing?

My company is not profitable.

IMPACT ON ME:

Local Impact: Why is the problem bad or important for you to resolve?

As Managing Director, I am ultimately responsible and accountable to ensure our shareholders get a return on their investment. If the situation does not improve, shareholders will likely vote to get me fired; a threat that has been hanging over me like a dark cloud.

IMPACT ON OTHERS:

System Impact: Why is the problem also bad or important to resolve for others?

Unless our company can return to profitability, employees and managers will face real risk of massive layoffs or even an acquisition by a competitor or bankruptcy.

Step 2: What to Change? Conflict Analysis (My Conflict and Their Conflict)

+ ON GOAL
Positive impact on System Goal Managing Director is able to improve profitability of company in responsible way
POT of GOLD
Positive of Change (Don’t have but want) Company can increase Sales Revenue (if prices is accepted) and then do not have to do layoffs (something he promised himself will be the absolutely last option)
MERMAID
Positive of Not Change (Have and want to keep) Everyone (including MD) keep their jobs and company survive current downturn without losing customers (due to too high prices)
CHANGE
Action you feel pressure to take to deal with Problem 

Pressure to INCREASE Prices on Special Orders requiring overtime or other costs etc.

NOT CHANGE
Opposite or Competing Action you feel pressure to continue with

Pressure to REDUCE Costs and layoff workers at factory High-Tech Lab

CRUTCHES
Negative of Change (Don’t have don’t want)Managing Director face risk that higher prices will not only cause them to lose orders but even cause loyal customers to switch to lower priced competitors.
ALLIGATOR
Negative of Not change (Have but don’t want) Managing Director face real risk of strike from workers, compromising delivery performance that could cause customers to switch to competitors.
THREAT TO GOAL
Negative impact on System GoalManaging Director is blamed for poor performance of company and is fired. 

 

Learn more about the ProConCloud Method

Step 3: Conflict Resolution

John decided to go for Method 2 – “Change ++”

Challenging Assumptions Analysis (Method 2 – Change ++)

ASSUMPTION INJECTION HOW TO
1st ‘Why?’: CHANGE will jeopardize POT OF GOLD because or when/if…

Customers will never agree to pay higher prices on special orders

1st +:  CHANGE will not jeopardize POT OF GOLD when/if….

Customers agree to pay higher prices on special orders

How to achieve this?

Company announces special offer. On all special orders, they guarantee much faster delivery in return for premium price and penalties if they deliver late

2nd ‘Why?’: CHANGE will result in ALLIGATOR because  or when/if…

Higher prices on special orders will result in lost sales

2nd +: CHANGE will NOT result in ALLIGATOR when / if …

Higher prices on special orders will increase sales

How to achieve this?

Company announces that premium prices is only on special orders where the cost of not having a product is MUCH higher for customers than the higher premium price.

Step 4: How to cause the change? – Planning ‘Yes, but…’ Analysis

1st Yes buts – Insufficiency Reservation

Stakeholder Change Insufficiency How to achieve sufficiency?
CFO The new injection will be Insufficient   because…

It is not clear whether premium prices on only special orders will be enough to return company to profitability

Add sufficiency

Create simple financial model to monitor whether there will be enough special orders with shorter lead times for premium prices to achieve profitability targets. If not, aggressively go after more customers that have frequent emergencies.

 

2nd Yes buts – Negative Branch Reservation

Stakeholder Predicted Negative of Successful Change How to prevent Negative?
Chairman Predicted Negative Yes, but

Offering penalties for late deliveries can reduce profits

Add risk protection

Offering penalties is only done when operations can show close to 100% on-time-in-full performance on shorter lead times


3rd Yes buts – Implementation Obstacle Reservation

Stakeholder Implementation Obstacles How to overcome Obstacles?
Sales Manager Obstacles Yes, buts

We do not currently have the new price list showing premium prices for faster delivery and penalties for late deliveries

Add how to overcome obstacles
Team is appointed to create new price list showing premium prices for faster delivery and penalties for late deliveries

Step 5: New Planning Best Practice – Summary of Full Analysis

They will never agree Resolved
Necessary Assumption
WHEN?
The company is not profitable which (for MD) If the situation does not improve, shareholders will likely vote to get MD fired; and (other stakeholders) can result in job losses, being acquired by competitor or even bankruptcy.
Strategy
WHAT?
Everyone (including MD) keep their jobs and company survive current downturn without losing customers (due to too high prices) AND Company can increase Sales Revenue without having to do layoffs (something MD promised himself will be the absolutely last option)

Without Risk of losing orders, customers or causing a strike.

Parallel Assumptions
WHY?
Conflict Assumptions Challenged…
Customers will never agree to pay higher prices on special orders à Customers will agree to pay higher prices on special orders with shorter lead times ucompany offers penalties for late deliveries
Higher prices on special orders will result in lost sales Higher prices on special orders will increase sales 

Yes, buts…

(CFO): It is not clear whether premium prices on only special orders will be enough to return company to profitability à

(Chairman) Offering penalties for late deliveries can reduce profits

Tactic
HOW?
Method 1: CHANGE ++

The Company INCREASE Prices on Special Orders requiring overtime or other costs etc.

1st +: Company announces special offer. On all special orders, they guarantee much faster delivery in return for premium price and penalties if they deliver late
2nd +: Company announces that premium prices is only on special orders where the cost of not having a product is MUCH higher for customers than the higher premium price.

 

+ Create simple financial model to monitor whether there will be enough special orders with shorter lead times for premium prices to achieve profitability targets. If not, aggressively go after more customers that have frequent emergencies.

+ Offering penalties is only done when operations can show close to 100% on-time-in-full performance on shorter lead times

+ Team is appointed to create new price list showing premium prices for faster delivery and penalties for late deliveries

Sufficiency Assumptions
WHY NOT?
OBS1) All: Obstacles Yes, buts
IO1) Sales Manager: Team is appointed to create new price list showing premium prices for faster delivery and penalties for late deliveries

Leave a Reply

Your email address will not be published. Required fields are marked *


By submitting this form, you are consenting to receive marketing emails from: Goldratt Research Labs, 125 Cambridge Park Drive, Cambridge, MA, 02140, http://www.goldrattresearchlabs.com. You can revoke your consent to receive emails at any time by using the SafeUnsubscribe® link, found at the bottom of every email. Emails are serviced by Constant Contact

This site uses Akismet to reduce spam. Learn how your comment data is processed.