Setting and Reaching the Objective of Profit Maximisation

This week I would like to do a small series of posts on Profit Maximisation and how it can be achieved. The series will start off with this post, with an overview of what Profit Maximisation is and some basics of how it can be achieved within a business environment. The next two posts will be based around certain aspects of a company, and how these can affect the objective of maximising your profits.

What is Profit Maximisation?

Objectives which are based around functional aspects of the business, which can be set to try and improve the amount of profit which the business makes. This could include effective and well thought out marketing campaigns to help increase sales, improving profit margins by minimising costs and many more ideas which can help increase productivity and therefore increase profits.

I will be going through some of these ways to improve profit in the following sections. If you have anymore ideas, please feel free to post them in the comments section.

Effective Marketing to Increase Sales

One way to try and achieve a Profit Maximisation objective is to try and sell more products. This can’t be done overnight and in no ways can be done easily, so you as a business, must take steps to try and market your business to gain interest, as this should then increase sales of your products and in the long run, profits will rise. The ‘effective’ part in this section is very important. Marketing a product or service costs a lot of money and therefore you must ensure that the marketing you are planning to do will not only increase sales, but it will get enough sales to cover the marketing costs and also increase profits. This is where financial plans will have to be taken into account, as you have to make sure that the marketing you are going to carry out has the opportunity to succeed. By getting the budgets and such wrong, you will be achieving Profit Minimisation, which obviously is the opposite of what you want.

The important aspect to look at when planning the budgets for this type of marketing campaign is to look at the payback time. It could be two months, it could be 2 years. You need to look into how worthwhile the marketing is. It may not get your sales up straight away and therefore it may not give you the invested money back, but it could help to increase your brand image, which as we discussed a couple of weeks ago, is very important. Looking into your other objectives as this point is very important.

Improve Profit Margins by Decreasing Costs

One of the easiest, well straight forward, aspects of trying to achieve Profit Maximisation is by decreasing the cost of making your products, marketing your products, or doing the same for services you provide. Decreasing your costs will help to build a bigger profit margin when selling your goods or services and this in turn will help achieve a bigger profit. However, you have to be careful when doing this, as when decreasing costs, sometimes quality is decreased and this could mean that less people are likely to buy your products, which in turn will work negatively for you. As well as this, say if you decreased costs by doing less marketing, you may not get the exposure you require to keep getting sales, consequently, you will again lose out on meeting your objectives.

What needs to be looked into here is the amount of sales which may be lost by decreasing these prices, as, if it isn’t that many, the bigger profit margin may counteract it and you could still increase your profits. However, if you really want to achieve your profit maximisation targets, you need to make sure that quality isn’t being decreased when reducing costs. By keeping the same product, you will get the same amount of sales, achieve a bigger profit margin and in the long run, meet you long-term objectives.

Using Capacity to Its Full Potential

When you have a lot of capacity to spare, whether that’s two computers un-operated in your offices, or half of a warehouse not being used to store your goods, you are losing money. This is being paying for space such as the two examples above are fixed-costs, meaning you pay the same no matter what. This in turn means that you are paying for empty space, by filling up these places; you can make sure that you are making full use of what you are paying for, therefore decreasing costs and achieving greater profits.

From this post I wanted to create on overview of how to achieve an objective of Profit Maximisation and what simple things you can do to make sure this happens. In the next post I will be looking at capacity utilisation in more detail, as I have only touched on the subject here. If you have any suggestions for the next articles, please leave a comment.

The Question

How does your business achieve Profit Maximisation?

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