How the Job Shop Pricing system works
The primary goal of the Job Shop Pricing system is to substantially increase your shop’s Net Profit.
What kind of shops? job shops, custom manufacturers, and machine shops.
Of course, this is “subject to” your unique Special Circumstances and real-world mitigating factors (for example, in a recession, highly competitive environments, demanding customers, manual labor, constraints, poor productivity, poor sales funnel, high mix, special jobs, prototypes, low volume, production runs, etc.).
Related objectives include:
- Ensuring enough sales revenue, by ensuring a high enough win-rate on quotes and by ensuring the right kind of jobs for productivity, and
- Ensuring enough Net Profit, by ensuring that all variable and fixed costs are covered and by ensuring a high enough Net Profit margin.
The Job Shop Pricing system was the first comprehensive pricing system to be based on Throughput accounting concepts. As of 2019, it is still the only one!
Originally developed by Brad Stillahn in the late 1990’s to use for pricing in the job shop he owned, it has now been systematized and successfully implemented in a myriad of complex custom job shops of all sizes, types, and complexities.
The Job Shop Pricing system is comprehensive, meaning it provides the “big picture” perspective of the financial condition of the job shop overall, while at the same time guiding decisions on specific quoting opportunities considering the type of job it is, the market segment served, and the perceived value by the customer.
During the initial analysis, you will learn how to significantly increase productivity as well as choose the best job mix and target markets to substantially increase your job shop’s Net Profit.
The 11-Step Job Shop Pricing system development and implementation works as follows:
- We will agree on the homework assignment, then
- Your team will complete the homework, then
- We will review the homework on a call, and then
- Continue this process until your improved pricing system is developed.
We expect to talk to review each homework assignment about every week, but we will go at your pace – faster or slower. The system usually takes about three months or more to implement, although it is possible to complete it more quickly. Some companies use the calls as a regular “management meeting” to stay focused on improvement priorities.
Development and implementation of your improved pricing system is your company’s responsibility. An improved pricing system means that quoting is quicker yet more reliable and is one that you are confident using. As you are developing such confidence, we recommend you continue using your current cost-based quoting process in parallel.
Our involvement is to guide your company through the implementation process using our unique combination of knowledge, skills and experience; and to help ensure that a thorough and effective analysis has been performed before you implement to lower the risk of you making mistakes and increase the probability of substantially increasing your job shop’s Net Profit.
Frequently Asked Questions (FAQ)
FAQ: What if I don’t have good data?
A common concern companies have before starting the Job Shop Pricing system is the quality of their data. Some companies have excellent data, while most have somewhat suspect data, and a few have unreliable data. However, we can work through the process effectively no matter what data quality you have because we can make some reasonable estimations when and where required, and/or you can make improvements in your data tracking during implementation. It is not necessary to implement a new tracking or ERP system before starting.
We will complete the weekly calls when you have finished the 11-Steps and implemented your improved pricing system, or at the end of six months, whichever comes first. We can discuss the need for any ongoing support at that time.
The inexpensive fee is conditioned on your team doing the homework and our involvement being limited to the calls to review homework and the control spreadsheet. That is where and when we can provide knowledge transfer and expert guidance.
If you have also elected the results-based option to achieve at least a 5% percentage point increase in Net Profit, we will continue with monthly calls to review the monthly control spreadsheet until that goal is achieved. We want you to achieve substantial increases in Net Profit – sometimes it takes longer to do so, and the probability of your success increases with our counsel and support.
FAQ: How do I sign up?
First we need to make sure that your shop is a good fit. Please request a Strategy Session on the “Contact” tab on the Menu bar. We will schedule a call as soon as mutually convenient to discuss YOUR shop, YOUR special circumstances, and what YOUR potential for increased Net Profit.
The Strategy Session is FREE, but we will ask you to do a little homework ahead of time. This way we can really understand your situation to determine what might be possible for you and to weed out anyone who is not willing to do the work necessary to get results.
This is NOT a sales pitch session. You will provide your financials and we will go deep to determine if Job Shop Pricing will work for you and how high is up. We will discuss your situation, explain the 11 Steps of the Job Shop Pricing system, and mutually decide if it is a good fit.
We don’t know if this will work for you. It has to be customized for your unique situation and special circumstances. That’s the purpose of the Strategy Session, to determine if you can get big results. If you can’t we will tell you.
We won’t be making a decision on the call, so there’s no pressure play going on here. We’re not selling timeshares. Even though we specialize in pricing, we are not going to gouge you. The majority of our fees come only when you achieve the agreed upon new higher Net Profit level. We want you to succeed.
Even if your shop is NOT a good fit, you will gain tremendous value from the Strategy Session.
“I’ve been in introductory sessions before that I considered to be a waste of time – usually it’s all marketing and no depth.
My initial discussion with Brad and Beau was very different from what I expected; they grasped my situation very quickly which led to an in-depth and focused discussion about my business.
Real ideas were offered which allowed me to start working on my problems right away.” Paul H., Job Shop Owner
If you are in the same type of business as your competitor, you will share many similarities. But when it comes to pricing, we really need to embrace those differences, as well as, any market and customer conditions. That is, what we call “Special Circumstances”.
You have different customers, different competitors, different equipment, different employees, and different capabilities. And so on. The list of differences between you and your competitors is a very long list.
It is crucial to tailor your pricing process by considering all your important differences in a systematic way.
If you do not recognize and appropriately incorporate your special circumstances into your pricing system you may be leaving dollars on the table. You may even disregard markets or opportunities because of not understanding your special circumstances. Perhaps worst of all, you could have filled your shop with work that could have made you significantly more money had you just understood and priced for these special circumstances.
Understanding your special circumstances is one of my favorite steps in the analysis. There is usually at least one “surprise” that results in a completely different way of looking at your business.
Let’s not simplify the difficulty of understanding your special circumstances too much. We spend a lot of time on it. Pricing is not just facts and formulas. Special circumstances include the numerous and wide ranging considerations that influence pricing from one job to another.
FAQ: How much time do we need to dedicate to implementing the Job Shop Pricing system?
You can dedicate as much or as little time week-to-week as you want to because we go at your pace. We support you for up to 6 months which is usually plenty of time to implement the Job Shop Pricing system.
Most of the weekly homework assignments take a few hours, at most, to prepare by someone who is good at spreadsheets. Those trusted employees that prepare the homework really seem to enjoy the challenge and opportunity to show their skills.
Many times, you’ll find the analysis so informative that you’ll continue to enhance the analysis way above and beyond our initial request.
Our weekly calls usually take about an hour. We enjoy what we do, so we are in no hurry to get off the call, but an hour is usually plenty of time to cover what is important.
FAQ: Who will we work with?
The Job Shop Pricing system is delivered by Brad Stillahn and Beau Ganas, Throughput Accounting Pricing Experts, Science of Business, Inc.
Brad developed the Job Shop Pricing system and has years of experience helping job shops apply it with their Special Circumstances.
Beau is both a CPA and Certified Management Account (CMA) who is expert at Throughput Accounting, Cost Accounting, and Information Systems.
Together, they’ll help you implement the Job Shop Pricing system.
FAQ: How much time will you devote to customizing the Job Shop Pricing system to our job shop?
If we have a weekly one-hour call for six months, and if both of us are on the call, that is over 50 hours. If the calls take more time, so be it. But once you “get” it, you’ll be doing the customizing and then checking with us to make sure you got it right and you aren’t taking unnecessary risks.
FAQ: What do you mean by “a substantial increase in Net Profit?”
During the Strategy Session, we will discuss what might be possible for your job shop as we review your financials in a Throughput Accounting format.
Our starting assumption is that Net Profit can be increased by as much as 10 percentage points in the first year of implementation, and then to as much as 20% Net Profit over time.
Of course, there are a myriad of factors that may affect that negatively.
The target during the Job Shop Pricing system implementation is an additional 5 percentage points Net Profit. But you are always in control and decide what prices to quote. We want you to be prudent.
Here are some Job Shop Pricing client results. You can get their full stories by signing for the 7 Pricing Tips and 2 Fatal Flaws report:
FAQ: My customers are VERY price sensitive and only buy on price. Can I still benefit from the Job Shop Pricing system?
Yes! In fact, in many cases we do not recommend price increases for this and a number of other reasons.
Helping you improve productivity, selectively job by job, will probably be how we help you benefit the most if your customers are price sensitive. Throughput Accounting provides a means to translate improved productivity into substantially increased Net Profit.
FAQ: We’re a very complex shop. We have specialized capabilities and have VERY demanding customers. Will Job Shop Pricing handle all these factors?
Yes. In fact, the most specialized you are, the greater opportunity we believe exists. We love to find job shops that run what we call “custom-custom” jobs because we believe they create a greater opportunity for a substantial increase in Net Profit.
Together, we will determine what is “the essence” of what you do. The point being is that, while your job shop is indubitably complex, if we can “simplify” all the moving parts, the analysis will be much more meaningful. We will take a lot of the noise out of the results. From there, we will develop an improve pricing system which uses that analysis to increase productivity and Net Profit.
FAQ: Do you work with small job shops?
Yes. After working for larger companies with access to excellent resources, Brad bought and owned a small job shop and was appalled by the lack of world-class consulting resources available to smaller job shops. And when he could find the resources, they were invariably very expensive.
So, learning from that experience, the Job Shop Pricing system is affordable for smaller job shops. The weekly online conference calls avoid the need for expensive travel and expensive day rates. The time is spent doing.
FAQ: Is the substantial increase in Net Profit guaranteed?
No, but we’re motivated to continue working with you until you succeed.
Let me explain, we have experience that the Job Shop Pricing system has the potential to yield a substantial increase in Net Profit in a relatively short period of time. But we don’t know about you and your team’s effectiveness and willingness to implement a new approach.
What we are willing to do is provide you a results-based option whereby we continue to support you with monthly review calls until you reach the improvement goal. At that time, we receive a bonus.
So, we’re motivated to continue working with you until you succeed. And before you can sign up we do a Strategy Session to make sure your shop is a good fit.
FAQ: Will the Job Shop Pricing system reduce the time it takes to quote?
Yes, it can. The analysis will yield the parameters required for quoting. If you systematize the results, quoting can be done very quickly.
For example, in the job shop Brad owned, even though every job was custom, 95% of jobs were “pre-priced” based on predictable configurations. Then, customer service could provide a quote on the phone in response to an inquiry while competitors took a day or more to respond to the same RFQ.
We understand you think this is impossible. And with the way you quote now, it is. But we think it is possible because we have a different and better way of looking at the opportunity.
FAQ: We waste a lot of time estimating and quoting because we only win a small percentage of our quotes. Will the Job Shop Pricing system help improve our win-rate?
One opportunity to increase your win-rate will come from selecting the type of jobs and market segments you prefer. You become expert at these, and “no-quote” jobs that are not a good fit. You have a higher chance of winning the quotes that are a good fit.
Another opportunity to increase your win-rate is quoting with “competitive” times. If you have ineffective equipment and people, you are probably using your actual times in your job cost estimating and quoting process. That is a recipe for losing the quote! But losing the quote might actually be preferred, because the margin on the job using your ineffective resources might be very low – too low. You may be better off to “no quote” these jobs as well.
FAQ – Is this about just getting rid of “unprofitable” customers?
No, Job Shop Pricing is not about getting rid of “unprofitable” customers.
Throughput Accounting provides a totally different perspective regarding the meaning of “unprofitable”.
Since every job creates Throughput-margin (and we do not allocate costs), there is no such thing as an “unprofitable” job or “unprofitable” customer.
In fact, the only way a job can be unprofitable is if you sold it for less than the Totally Variable Costs it took to make it (for example: the materials, subcontracting, freight, and sales commission).
Since a customer is usually the source of more than one job, and since individual jobs are not unprofitable, then customers are also not unprofitable.
Using Throughput Accounting, every job (and every customer) is the source of Throughput-margin which accumulates during a period of time. This is analogous to the fact that Operating Expenses also accumulate during a period of time.
Rather than allocating those Operating Expenses to jobs, as cost accounting does, we add up the margin and see if it is more than the Operating Expenses in total for a period of time. If it is, that is Net Profit!
So, if you get rid of jobs, you are reducing the Throughput-margin that helps “add up” in the period.
Warning!!! Please realize there is a lot more to it than that.
FAQ – You are just going to tell us to raise prices, correct?
Raising prices is very risky. It jeopardizes the job and the customer. It is hard enough to win the business in the first place, so raising prices must be done judiciously, if at all.
All the other options should be evaluated first.
For example, we are going to tell you to improve productivity. We want you to improve overall productivity, and productivity on individual jobs. Especially for those jobs that that are not performing as well as other jobs.
We want you to understand your preferred market segments and preferred job mix. We want you to have a robust sales funnel full of excellent opportunities.
We want you to understand your competition. We want you to understand how their insistence on using cost accounting has blinded them to opportunities and provided you a price umbrella on a significant amount of business that would be a good fit for you.
Once you have done that, maybe there will be some jobs that do require price increases. But we will not have to tell you. Rather, you will be telling us which jobs, why, and by how much.
FAQ: What do I do next?