Leading Entrepreneurship

During our discussion of gross profit margin, I suggested that you should be looking for 3%. Why?

My exact quote was:

“At Gambit, we actively seek 3%. An expense reduction, or price increase, of less than 3% separates the average profitable and unprofitable business transaction across all US firms.”

We use the benchmark of 3% really as a wake-up call to high-growth firm leadership, because even if the gross profit margin looks strong, it will not in a year or two without proactive management.

Other than our own findings regarding profitable business transactions, both US inflation and producer price indexes have grown at approximately 3% per year over the last decade. What does this mean? It means that the large firms get it… consumers have to pick up the tab for cost increases. However, growth firms typically believe they can outgrow this issue.

The problem with this is that some issues are difficult to sell your way out of. For example, if you are leading a $5 million firm with 40% gross margins, an absorbed 3% COGS increase means you would have to increase sales by $225,000 (or 4.5%) just to compensate. Even if your firm is growing at 20%, this cost would consume almost a quarter of your growth.

For these reasons, Gambit almost always recommends an annual 3% price increase, on average, for high-growth firms - even when profits currently appear strong.