What is Profit Maximisation?

By Moira McCormick on February 7, 2017

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It doesn’t matter whether you are a startup or a multinational company, every business is looking to grow its profits. Profit maximisation is the process that companies undergo in order to determine the best output and price levels in order to achieve its goals. 

Profit maximisation is one of the fundamental assumptions of economic theory. It will be achieved when a firm reaches the stage of equilibrium. A firm is said to have reached equilibrium when it has no need to change its level of output, either an increase or decrease, in order to maximise profit.

If a business faces tough competition sometimes the only way it can survive is to pay extra attention to revenues and costs – and to adjust them accordingly.

Profit maximisation is a good thing for a company, but can be a bad thing for consumers if the company starts to use cheaper products or decides to raise prices as a way to maximise profits.

So, when it comes to profit maximisation in business, there are two simple options open to you.

 

Sell more

Some suggestions as to how to achieve this goal:

Increase the quantity of sales, for example by better product marketing or improving quality.  Analyse where sales are most buoyant and focus on making more sales in those product/service categories.

Up-sell to existing customers, for example by persuading them to buy enhanced services or accessories.

Diversify into selling a wider range of products.

Revise pricing to produce a more efficient balance of the number of sales and the revenue from each sale. One of the easiest ways to maximise your profits is to increase your prices. Remember, having a good business is not all about offering the lowest price.

If you have a superior product, don’t shy away from charging a higher price. You may lose a few customers initially, but studies show they are likely to return for a quality product or valuable customer service options.

Engage with your customers. Create relationships that will keep them coming back for more with excellent customer service.

 

Pricing Assessment

 

Cut Costs

There are also several ways to cut costs, both fixed and variable. To apply this profit maximisation option, here are some suggestions:

Analyse where money is being spent. Overheads are one of the biggest categories of expenses that business owners face, e.g. rental and energy costs.  Look around to get better deals.

Outsource. Look for strategic partners who can offer certain freelance or outsourcing services on a pay-as-you-go basis. Design projects, press releases and website content are all things you could stop doing in-house. Focus your full-time employees on revenue-building projects and send simple tasks out for others to complete.

Negotiate cheaper prices for supplies, particularly when buying in bulk.

Make your manufacturing process more efficient, for example by breaking it down into individual tasks and setting up a production line system. Improving your business processes can reduce wastage. Always adopt time-saving and production boosting technologies.

Buy equipment you currently lease, or lease the ones you currently need to buy or do a hire purchase. Assessing your costs in this area may require taking a long-term view.

Review your cost structure. Make sure you have a sufficient markup on your goods. When the cost of raw materials and related costs increase, the additional costs need to be included in the selling price. Reviewing your cost structure on a regular basis will help you keep track of costs that are on the rise before the cost is too great to be wholly passed on to your customers.

Copy best practices from others. Find out what’s working for your competition or similar companies and implement it in your business. There is nothing wrong with having a business model that works well, even if it is similar to another company.  Don’t be afraid to take others’ ideas and strategically mould them to fit your company.

Find a way to differentiate your product or service from others.

Have an online presence.  If people don’t know about your brilliant company, then you may have a problem increasing profits.  Create a website, build your social profile and blog about your industry. Let everyone know about your wonderful company and how great your product is.

 

Reaching a level of equilibrium

Profit maximisation is all about a company reaching a level of equilibrium output so that its profits are at a maximum level – and these profits are the difference between total revenues and total costs.

It makes complete business sense to operate at a profit maximisation level – anything less could result in a failing (and costly) business.

 

Free Pricing Audit

 

Related Posts

How to Manage Pricing and Gain Profits

Your Priority Should be Profitable Growth Not Higher Prices

6 Tips for Profit Maximisation

 

Sources

https://hbr.org/1992/09/managing-price-gaining-profit

http://economics.illinoisstate.edu/ntskaggs/readings/maximization.shtml

https://www.quora.com/What-are-the-well-known-techniques-of-profit-maximisation-in-economics

http://www.naijapreneur.com/profit-maximization-strategies/

http://dailyojo.com/articles/profit-maximization-explained.html

http://www.industryweek.com/growth-strategies/levers-mastering-margins

https://www.entrepreneur.com/article/53786

http://www.profitsleakdetective.com/articles/32-dont-increase-sales-increase-gross-profits

http://www.buildingtrade.org.uk/articles/markup_or_margin.html

http://smallbusiness.chron.com/list-factors-consider-setting-product-price-49478.html

The Strategy and Tactics of Pricing, Tom Nagle and John Hogan, 2016.

Pricing Strategy: Tactics and Strategies for Pricing with Confidence, Warren D. Hamilton, 2014.

Pricing for Profit: How to Develop a Powerful Pricing Strategy for your Business, Peter Hill, 2013.

Pricing Strategy:  How to Price a Product, Bill McFarlane 2012.

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