The basics of running a business will always include the topics of sales maximization and profit maximization in the list of necessary information. While they are both useful concepts, though, they can be easily confused with each other in the actual day-to-day operations of running a business. Understanding the differences between the two strategies will enable you to pursue the strongest financial position for your business.
At its simplest level, sales maximization means selling the most goods or services possible under a business model. A company could look at it in terms of the quantity of goods sold or in terms of the revenue brought in by those goods sold. In either case, to maximize sales, a business would pursue methods that bring the most possible sales, regardless of the cost of the goods sold or of any other costs incurred by selling.
Profit maximization, on the other hand, is pursuing the highest possible profit. Profit is total revenue minus total costs. If a company aims to maximize profit, it is attempting to have the most possible money once all buying and selling is finished. A company could increase its profits by raising its sales revenue (e.g., selling more items), but it could also lower its costs for a similar positive change in profit. A company could also pursue some combination of the two strategies, raising sales while lowering costs, which is what most businesses do.
Relationship Between Sales and Profit Maximization
Sales and profit maximization are related, but they are not the same thing. Costs per item sold change as more and more goods are sold. In small quantities, costs per good sold decrease quickly, meaning that to sell more is also to profit more. However, as the quantity of goods increases, at some point the cost of each good sold will surpass the revenue brought in by that additional unit. (Economists refer to this as the law of diminishing returns.) In that situation, to sell more would increase total sales revenue but decrease total profit.
Which Should a Business Pursue?
Successful businesses compete by maximizing profits, not sales. The challenge for any business is to find that position where it is selling as many goods as possible before costs per item start to eclipse the revenue that an item brings in. By finding this production point, a business can be sure it is not leaving any possible profits on the table by under-producing, while not overselling to the point of costing itself money. If it maximizes profits instead of sales, the business will be on its best financial footing.