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Profit Maximization Strategies- How to turn your business more profitable?

Varun Hariharan

| Updated: Dec 04, 2020 | Category: Finance & Accounting

Profit Maximization Strategies

It does not matter whether you are a small start-up company or an international corporation; every business is looking for ways to grow its profits and augment the scale of its business. Many business owners think they only need to increase sales to maximize profit. Perhaps they should think again because having the right price is the most basic and essential management function – which can contribute to improved profits much faster and more efficiently than just a rise in revenue or sales volume. This article explains the different profit maximization strategies that a business firm may adopt to create a positive ripple effect in its earnings in the long-run.

Profit Maximization

In a simple sense, profit maximization is selling at a higher price than the cost. Profit maximization is subject to the long-term outlook and includes wealth development and several non-financial factors such as goodwill, societal factors, connections with business parties, etc.

The pricing mechanism, according to Solomon, channels managerial efforts toward more profitable goods or services. Prices are dictated by the conditions of demand and supply as well as the competitive forces, and they direct the allocation of resources for various productive activities.

In economic theory, the behaviour of the firm is analysed in terms of profit maximization. The classical economic view of the firm, as put forward by Hayek (1950) and Fredman (1970), is that it should be operated in a manner that maximizes its profit. This occurs, in economic terms, when marginal revenue equals marginal cost.

The company’s behaviour is interpreted in terms of profit maximization in economic theory. The company’s classical economic view, as advocated by Hayek (1950) and Fredman (1970), holds that the firm should act in a manner that maximizes its profit. In economic terms, this happens when marginal income grows higher than marginal costs.

Maximization of profit means a business either generates maximum output for a given amount of input, or it requires minimal input to generate a given output. Efficiency is the underlying rationale for profit maximization. Profit maximization is believed to result in efficient resource utilization under the competitive market environment, and profit is regarded as the most accepted measure of the success of a business. Profit maximization is, thus, considered an essential objective of an organization’s financial decision-making. This ensures that the company makes the most effective use of its available capital under competitive market conditions.

Profit maximization strategies – basic ways

The two most common and universal laws of improving the profitability[1] in business are increasing revenue, i.e., selling more and decreasing expenses, i.e., cutting down on costs.

Profit maximization strategies:

1. Increasing revenue

2. Decreasing expenses

Increasing revenue:

  • Boost the sales value, e.g. by better product promotion or enhanced quality. Analyse where the revenue comes mainly from and focus on making more profits in those particular areas of product/service.
  • Up-sell to existing customers or clients, for instance, by persuading them to purchase enhanced services or accessories.
  • Diversify into selling a wider range of products or services
  • Develop new product lines after surveying your customers about new products
  • Increase employee productivity — appreciate and reward employee efforts with employee performance reviews and teach them sales skills and how to upsell goods so that consumers make multiple purchases at once
  • Find new customers and new markets. Remember new customers can help grow your business. Make use of market research to determine if you could expand your business into new areas.
  • Pay attention to the customer service department and improve your customer service by devising a staff training program
  • Consider increasing your prices — check whether you have priced your products and services correctly and if you could increase the prices without declining sales

Decreasing expenses:

  • Analyse where cash is being spent. Overhead is one of the main cost groups that company owners face.
  • Decrease direct costs and negotiate cheaper rates/discounts with vendors for supplies, especially when buying in bulk.
  • Make the manufacturing process more effective, for example, by breaking it down into individual tasks and creating a production line structure. Improving your business processes could financially reduce wastage. Always adopt modern technologies for saving time and boosting production.
  • Reduce inventory and implement stock control measures as a good way to streamline your business
  • Decrease indirect costs and make efforts to minimise waste/errors in your business by training the staff, or reduce marketing costs by using low-cost marketing strategies
  • Decrease overheads and try to save energy wherever possible or try to find a cheaper energy supply company
  • Benchmarking main financials — benchmarking your company lets you compare the expenses (such as rent and utilities, etc.) against similar businesses in the sector to see whether you pay too much

Some more ways to maximise profits

Cracking the profitability codes is one of the indelible things a company has to do. Firms must do it because that is the main objective of opening up the business. Hence, when it comes to increasing profits, there are aspects, comprising the universal laws of profitability and some peculiar elements that a company must look at. Mentioned below are some more profit maximization strategy that can be beneficial:

  • Outsourcing:

Outsourcing can function as one of the best profit maximization strategies for any business. Regardless of what type of business you are in, you probably have work that can be outsourced at a minimum charge. Search for strategic partners that can provide a pay-as-you-go basis for some freelancing or outsourcing services. Project ventures, news releases, and material on the website are all items that you may avoid doing internally. Focus on revenue-building projects with your full-time staff and send out basic assignments for freelancers to complete. This will reduce your operating costs and increase your productivity.

  • Borrow Best Practices from Others:

Find out what works for your competition or similar businesses, and put it into action in your business. There is nothing wrong with creating a well-functioning business model, even if it is identical to another organization. Don’t be afraid to take others’ ideas and strategically mould them to fit your company and find a way to differentiate your offering.

  • Educating prospective customers:

Creating a wide online presence is one of the most important profit maximization strategies. Digital marketing plays an extremely important role in boosting a business’ profit potential. However, it involves several areas that require your attention, such as e-mail marketing, social media, SEO, and paid advertising. If people are unfamiliar with your growing business, then you may have a problem with increasing its profits. Creating a website, joining Facebook and blogging about the business are some steps that one should take.

Let everyone know your business, and how great your product is. Take things one step further through making advertisements for your business and by using the mediums that the ideal customer would resort to. Focus on engaging your customers once you have obtained the attention and try to establish amicable relationships to hold them coming back for more.

  • Analyse profit margins:

The overall gross profit margin may prove to be lacking in detailed analysis. Instead, find the gross profit margin for each of the goods and services and even evaluate the gross profit margins for different business units, product types, suppliers or consumer groups. By doing so, you can recognize low-margin/loss-making goods as well as profitable products. Stop selling low-margin lines and concentrate on those which generate the most income.

  • Develop a better pricing strategy:

Fine-tuning the strategy on pricing can have a huge effect on your earnings. The pricing framework is extremely important in influencing your profitability, so you must make the correct price for your product. Set your pricing based on the benefit that the consumer derives from your product, rather than the cost. For example, in software, the marginal cost (the cost of making just another copy of the software) is essentially zero, so cost-based pricing will make it incredibly difficult to make any money.

Use the quantified value proposition, and determine how much value your customer receives from your product, and charge some fraction of that as your price. Besides, analyse from the customer’s standpoint, the alternative products available to him, and how much the customer would pay for each one of them.

Also, different types of customers will pay different amounts, based on how early or late they purchase compared to other customers, and a differentiated pricing plan and structure for these distinct groups of customers will mean dramatically higher profits for your company. For example, technological enthusiasts are the first people to buy a product. They love technology and will buy one of anything.

Moreover, allow for flexibility on pricing with customers, whether through discounting an up-front charge or through a free or low-cost trial period, as it is important to get them committed and satisfied.

Prioritize your profit maximization strategies

Keeping your business more profitable requires looking out for ways to raise revenue from sales as well as reducing costs and benchmarking your company to see where you can save money. When your key profit drivers have been established and calculated, you will build strategies to grow them, without growing costs.

Once you have chosen the strategies to increase the profitability of your company, you will prioritize them in the order of importance. It’s a good idea to write down your goals and the corresponding plans for achieving them, as well as how you plan to execute such profit maximization strategies.

The most essential factor for your business is your goods or services with the highest gross profit margin, as they produce more revenue. You should concentrate on hitting higher revenue goals for them once you have established the most valuable products. This may allow you to reconsider aspects of your company or to formulate strategies for improvement.

Conclusion


To stay competitive by generating higher value for customers, businesses are continuously searching for profit maximization strategies and tactics that optimize profit. Profits can be maximized by rising revenue per unit, reducing cost per unit or a combination of both.

Read our article:Strategic Financial Resources Management

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Varun Hariharan

Varun Hariharan has completed the Legal Practice Course from BPP Law School, Manchester. He has a Masters in Commercial and Corporate Law from the Queen Mary University of London and LLB Honours from Bangor University, UK. He specialises in law related to corporate, artificial intelligence and technology law.

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