The 1% Profit Rule - Part 1

The 1% Profit Rule is a concept introduced by one of my early mentors, Bob Gernon, principle of Gernon and Gernon of Ontario, Canada.  It is the idea of making organizational change that drive profit in increments of 1%. Most organizations shoot for big changes and as such fall short of their goals or leave the job half done. The 1% Rule introduces change in manageable bite size chunks that when fully implemented result in significant bottom line improvements.

In every organization there are four components to driving profit:

1. Sales Increases: For every percent you improve sales using your existing sales infrastructure, you increase net income equivalent to the gross margin contribution of those sales.


2. Price Increases: Every percent increase in price increases net income by the same amount as the price increase. A well managed price increase should never add any additional cost to your operation.


3. COGS Reduction: You can reduce COGS either by improving productivity to decrease labor costs or decrease your material costs through improved purchasing execution, in addition to other direct and indirect costs. Every percentage gained here cascades profit to the bottom line.


4. Expense Control: These are savings garnered through lower SG&A costs.

The following tables illustrate the power of 1%. Table 1 shows the current financial state of a fictional company, table 2 shows the impact of making a 1% improvement in each component assuming all else remains the same. The third and final table illustrates the impact of all 1% improvements in combination. Simply, applying 1% improvements across the company realized a net income benefit of $545K! Wow!

1% Rule Sample TablesOK, it sounds easy, but it's all in how you execute.  Our next posting will provide you an example and also the link to download a copy of our complimentary 1% Template.