What is Revenue Maximization?
Revenue Maximization is the maximization of sales of a business using measures such as advertisement, sales promotion, demos and test samples, campaign, references, etc to increase revenue and capturing higher market share in an industry. Technically Revenue is maximized at a point where MR (Marginal Revenue) equals 0.
- Each business start-up has a vision of maximizing the wealth of shareholders. In order to achieve this objective, the major role is handled by Revenue. Increasing revenue leads to profit maximization and ultimately increase the wealth of shareholder. In the modern era, it is very difficult for any organization to increase its revenue. It’s a customer-driven market. If a customer is cent percent satisfied, the product/service will get attention and will boost up the revenue.
- Haphazardly company cannot increase its revenue without thinking about its shutdown/losses. It must stop at a point where Marginal revenue derived from selling a single unit reaches 0. Even after the company increases its revenue, it will incur losses if the quantity sold is more than to point of revenue maximization. It has not to just increase Revenue but to Maximize the revenue keeping into mind its sustainability.
Example of Revenue Maximization
Let us consider an example of a business selling Pens. It is newly launched and wants to maximize its revenue. Here is the table stating its Selling price, Quantity Sold.
Calculate the total revenue and marginal revenue.
- Selling Price = Price at which a pen is sold (It Decreases as an increase in Qty sold)
- Qty Sold = Qty sold in the market
Now, calculate the total revenue as shown below:
- = (180-100)/(2-1)
- = 80
Similarly, calculate the other marginal revenue.
Revenue is maximized at a point where Marginal Revenue = 0
Below is the graph of Revenue maximization. The point at which Marginal Revenue is 0 is the point at which revenue is maximized. In our case, it is when 6 qty is sold. Total revenue is also high at this point. After this point, even after increasing Qty Sold, Revenue will not be maximized. Marginal revenue will fall.
It must make clear in mind that Revenue has not just to be increased but to be Maximized in order to wealth maximization. Without determining a point at which revenue is maximized, if blindly targets are set to maximize Sales, things won’t go well. Benefits are listed below-
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#1 – Increase in Market Share
When it’s a start-up, it is very necessary to build up a strong and large customer base to have place into the market. i.e. creation/expansion of Market share. As we saw in the above example, the price will fall as the qty sold is increased. This lets selling a product at the lowest possible price and gaining more customers eventually leading an increase in market share.
#2 – Creation of Brand Name
A good brand name can be created if products/services are sold at a comparatively lower rate and of efficient quality. This will bring loyalty to customers. Customers will retain for a longer period or till forever in some cases.
#3 – Benefit of Economies of Scale
When a company can sell more qty at a lower price, it has the advantage to produce high qty. For example, it can fully utilize the amount paid for Fixed Costs. The fixed cost per unit gets decrease as the qty sold/produce increases. Rent, Admin Expense, etc can be fully utilized. Benefits of high qty sold can be availed which helps in increasing profitability
Revenue Maximization vs Profit Maximization
To make it simple, Revenue Maximization is a point at which a business keeps selling till marginal revenue does not fall negative and profit maximization is a point at which business sells to point at which its marginal cost does not increase its marginal revenue.
|Revenue Maximization||Profit Maximization|
|Qty sold to a point at which MR=0||Qty sold to a point at which MR=MC|
|Where MR= Marginal Revenue||Where MR= Marginal Revenue, MC= Marginal Cost|
|The aim is to increase the customer base and capture high market share||Aim to increase the profitability of a business|
|It is suitable for a new entrant to a market or existing business expanding into new product line eg. Reliance Jio||It is suitable for an existing business whose reputation is maintained in the market and has a well-established client base who is more concerned of the better quality of product/ service and not cutting down the price.|
|It is a long term objective||It is short term objective|
|Business having this strategy is capable to take up any new opportunity into the market and take up its utmost advantage||Business becomes a bit rigid and has to lose a few new customers in non-flexibility of cutting down prices.|
This has been a guide to what is revenue maximization. Here we discuss examples and benefits of revenue maximization along with its differences with profit maximization. You may learn more about financing from the following articles-