Category: 

What Is Profit Maximization?

One avenue for profit maximization may be to increase advertising activity.
Two ways to maximize profits are to increase revenue and cut costs.
Article Details
  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 06 November 2014
  • Copyright Protected:
    2003-2014
    Conjecture Corporation
  • Print this Article
Free Widgets for your Site/Blog
In ancient Rome, purple dye was made by boiling dead sea snails, taking 10,000 snails for every gram of dye.  more...

November 22 ,  1963 :  US President John F. Kennedy was assassinated.  more...

Profit maximization is the process of identifying the most efficient manner of obtaining the highest rate of return from its production model. There are several different approaches to this pursuit that may be used by any corporation or business. Most approaches require that the company look closely at the costs of production, the current levels of supply and demand, and the price that can be obtained for each unit while still attracting the highest volume of consumers.

It is important to note that the process of profit maximization is not simply about tweaking an existing system to generate some amount of profit increase. The goal of this effort is not aimed at realizing some type of profit, but at achieving the highest profit margins that are possible, given the current circumstances. For this reason, the process will often involve a detailed investigation of all aspects of the company operation, the amount of market share held by competitors, the current status of the marketplace, and the desires of the targeted customer base.

Ad

A good place to begin the effort is to consider the costs of operating the company and producing goods and services for sale. This often involves looking at both the fixed and the variable costs associated with the business. Expenses that are constant and are incurred regardless of the rate of production are generally considered fixed and not likely to be eliminated. Variable expenses are related to the production process and do change over time. When looking for ways to obtain the maximum amount of profit possible, the goal is often to find ways to manage fixed costs to their best advantage, while also evaluating variable costs to determine if they are still important to the operation. Assuming that a given variable cost is key, strategies to reduce that cost are explored, hopefully without negatively impacting the quality of the goods or services that are produced.

Profit maximization also looks at factors outside the actual production process. For example, the focus may be on finding new ways to advertise and promote the product line, especially if those approaches are likely to generate more revenue and cost less to maintain. While the manufacturing facility may already be operating at full capacity, the right marketing campaign can make it possible to move more products and increase the bottom line of the business. This, in turn, helps to increase the profits that are ultimately realized by the company. By using the right advertising strategies and selling the goods at prices that consumers are willing to pay, the maximization efforts may be successful, and the business can enjoy total revenue that is at the highest level possible.

Ad

More from Wisegeek

You might also Like

Discuss this Article

reader888
Post 2

I have a small business, and I'm looking into everything I can possibly do to make it better. It's doing just fine, but I think there's always room for improvement.

I could try to determine the profit maximization on my own, but I don't know if I would be aware of every single factor that needs to be considered.

Are there professionals you can hire to figure this kind of stuff out? I definitely don't mind spending some money to make sure it's done right.

heath925
Post 1

This sounds like it is a very complicated process. It occurred to me that the reason some businesses fail is because they don't determine the profit maximization before starting a business.

I've known people who are very excited at the prospect of opening a small business someday. It's a dream, but it's also a lot of work. And there's a lot that goes into it, like profit maximization, that people just don't realize beforehand.

So, if this isn't all figured out before a business is started, it may come as a surprise when a business owner isn't making the profit they thought they would.

Post your comments

Post Anonymously

Login

username
password
forgot password?

Register

username
password
confirm
email