Phil Wright – Director
Ever heard of the ‘aggregation of marginal gains’? This approach has been widely written about in the world of sport, but did you know that it can also applied to the world of business.
The aggregation of marginal gains – aka the 1% rule
The theory is that by making small increases or changes to one, two or even three key areas in a business the positive impact on a company’s profit and loss account can be substantial.
If we consider the three variables in business to be (1) sales, (2) gross profit margin and (3) overheads how might a 1% increase in (1) and (2) and a 1% reduction in (3) impact the business?
Calculating business impact on a 1% increase
| Current Position | Base | 1% |
|---|---|---|
| Sales | £3,000,000 | £3,030,000 |
| Gross Profit Margin | 20% | 21% |
| Gross Profit | £600,000 | £636,300 |
| Overheads | £450,000 | £445,500 |
| Profit Before Tax | £150,000 | £190,800 |
| % Increase in Net Profit | 27% |
From our example we can see that by just moving these three variables favourably by 1% delivers a 27% increase in net profit!
For sales, this may be a price increase or a new customer, for gross profit margin it may be stronger supplier negotiation, achieving prompt payment discounts or an internal improvement to increase efficiency and less wastage.
In terms of overheads reductions, the company may be able to agree reduced rates or a rent-free period or buy in large quantities of computer consumables and stationery to reduce down delivery charges – we’re only looking for the 1 percent on each expense heading to make a huge change to the bottom line.
Clearly with all three variables working in the right direction the aggregate gain to a business is huge!
So, this sounds great in theory, but what about in practise? Let’s look at a few sporting examples of the impact of the 1% rule.
The Rise of British Cycling
Whilst reading about Chris Froome’s triumph in the recent Tour de France, I was reminded of a programme a few years ago explaining the meteoric rise in British cycling. One of the key factors which became synonymous with the London 2012 Olympics success was
When we look at the meteoric rise in British cycling (and in particular the success at the 2012 London Olympics), Performance Director David Brailsford believed that the application of ‘aggregation of marginal gains’ across everything to do with the training, recovery and diet would add up to a significant improvement in performance. The result? Well Team GB went on to have one of their most successful gold medal hauls in cycling.
Who is Arsene Wenger?
In 1996 a little-known French football manager took the helm of Arsenal Football Club. 22 years later it is widely recognised that the now retired Arsene Wenger made a huge impact not just to Arsenal, but to football full stop. He bought a new way of thinking, that a number of small improvements would collectively bring results.
In this case training was short, sharp and decisive, no longer laborious and never-ending running drills, players diet’s improved, pre-match routines were meticulously planned, sports science emerged, tracking player’s movement and medical statistics during training and games, the role of the club doctor evolved – all comparatively ‘small’ improvements, which helped the club transition to the quick counter attacking side of the late 1990’s that went on to so much success.
Calculating business impact based on a 1, 2 or 3% increase
So if the theory works for 1%, what would happen if we took this one step further. How about a 1, 2 or even 3% change? Let’s see shall we:
| Year 1 | Year 2 | Year 3 | ||
|---|---|---|---|---|
| Sales increase | 1% | 1% | 1% | |
| Gross Profit % increase | 1% | 1% | 1% | |
| Overheads reduction | 1% | 1% | 1% |
| Base | Year 1 | Year 2 | Year 3 | |
|---|---|---|---|---|
| Sales | 2,000,000 | 2,020,000 | 2,040,200 | 2,060,602 |
| Gross Profit % | 26% | 27% | 28% | 29% |
| Gross Profit | 520,000 | 545,400 | 571,256 | 597,575 |
| Overheads | 345,000 | 341,550 | 338,135 | 334,753 |
| Profit before tax | 175,000 | 203,850 | 233,122 | 262,821 |
| Net profit % | 9% | 10% | 11% | 13% |
| Increase from base | 28,850 | 58,122 | 87,821 | |
| 16% | 33% | 50% |
Pretty impressive when you do the sums!
Try calculating it yourself
The aggregation of marginal gains concept has come up in many client discussions and we’ve had the privileged of demonstrating the huge impact on a company’s results with, on the face of it, very minor improvements. We’re always happy to show you how you can unlock the factors that can contribute to the growth of your business so why not see for yourself with our simple calculator.
Step 1 – insert your current year’s Sales, Gross Profit or Overheads figure.
Step 2 – add in your percentage movements (use a – symbol to show a decline).
Step 3 – see your results in difference and total!