40 Percent Profit Rule
Reject work that cannot clear a 40 percent profit threshold
- Difficulty
- Easy
- Time to result
- ~days to results
- Steps
- 4
- Confidence
- 96%
The 40 Percent Profit Rule is a hard financial screen Gary Surdam learned while working as an executive for the Chicago Tribune. Before accepting an opportunity, estimate its revenue and delivery costs, calculate the expected profit percentage, and compare that result with a 40 percent floor. If the return is lower, the default decision is not to proceed, even when it misses by only a tenth of a percentage point. The mechanism removes emotional bargaining around marginal work and keeps attention on offers that can support a sustainable company. Surdam connects this lesson with a later Harvard Business School insight: an education business cannot remain sustainable when its founder gives the work away. The threshold is his reported rule, not a universal margin benchmark for every company.
Origin
Gary Surdam said the Chicago Tribune taught him to reject work below a 40 percent profit threshold.
Core principles
- 01A clear profit floor makes opportunity decisions consistent
- 02Revenue without sufficient margin does not sustain a company
- 03A near miss remains below the threshold
How to run it
- 1
Estimate the revenue
Define what the customer will pay for the opportunity. Use the amount reasonably expected rather than an aspirational figure.
Pro tip Evaluate one offer or project at a time.
Watch out Do not confuse gross sales with profit.
- 2
Count the delivery costs
Identify the direct costs required to complete the work. Include the resources that must be committed for delivery.
Pro tip Use the same cost categories each time so comparisons remain consistent.
Watch out Leaving out a material cost overstates the expected margin.
- 3
Calculate the profit percentage
Subtract costs from revenue and express the expected profit as a percentage. Compare the result with the 40 percent floor Surdam describes.
Pro tip Keep the calculation visible when discussing the opportunity.
Watch out Do not round a result below 40 percent up to a pass.
- 4
Apply the threshold
Proceed only when the expected profit meets the floor. Otherwise reject, reprice, or redesign the opportunity before reviewing it again.
Pro tip Change the economics before changing the verdict.
Watch out A strategically chosen exception would no longer be an application of this hard rule.
In the wild
Surdam says the Tribune required 40 percent profit and treated 39.9 percent as below the line. The opportunity therefore did not pass merely because it was close to the required return.
→ A precise threshold prevented a near miss from being rationalized into an acceptable project.
Common mistakes
Treating revenue as sustainability
A project can bring in money while still failing to produce enough profit to support the company.
Making exceptions for near misses
Calling 39.9 percent close enough removes the consistency that gives the threshold value.
Is it for you?
Best for
It is best for founders who need a simple margin screen for offers, projects, or product lines.
Not ideal for
It is not ideal when a different margin floor is justified by the business model or when the necessary costs remain unknown.
From the transcript
“if you're making less than 40% profit then you don't do it”
“Even if it's 30 39.9% it has to be 40%.”
“you can't have a sustainable company if you're just giving it away”
From the episode
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