Why Do Many Firms Not Maximize Profits?

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In theory, maximizing profits is an objective of any for-profit company. However, many companies make other goals a priority over profit maximization. Additionally, some aspects of running a business that meets social and environmental obligations take away from the sole focus of profit maximization.

Long-term Objectives

  • In some cases, companies simply take a long-term view that includes a more moderated approach to generating profit. Rather than driving employees tirelessly to produce and sell, you can motivate employees and build a stable and enduring culture that lasts. Similarly, as opposed to attempting to get top dollar from customers on a short-term basis, some companies focus on providing good quality products and services at affordable prices. When customers experience good value, they are more likely to return.

Philanthropy

  • The altruistic motives of company leaders can also mitigate the importance of profit maximization. Many companies routinely donate a percentage of their profit or revenue, along with goods and services, to various charities. They often do so in an effort to create a strong bond with local communities in which they operate. While such philanthropic activities can moderate profit in the short-term, you may actually attract more customers and garner more loyalty over time because of them.

Corporate Social Responsibility

  • Corporate social responsibility refers to a balanced business approach where you seek to earn profit while also meeting social, ethical and environmental responsibilities. CSR centers on relationships with communities, customers, employees and business partners, along with investors. Along with charitable giving, it includes being good community citizens, participating in local events, giving employees paid time off to volunteer and engaging in environmental programs to preserve natural resources. All of these activities cost money and contradict a profit maximization objective.

Revenue Maximization

  • Maximizing revenue and maximizing profit are typically competing goals. Some companies opt for the former in the short-term to improve long-term profitability. Revenue maximization means you emphasize attracting as many customers as possible and generating as many sales as possible. This objective may involve low-price strategies and discounts, which contribute to more sales transactions and revenue, but moderate profit. Along with building a customer base, the need for quick cash and clearing out excess inventory are motives for a revenue maximization goal.

References

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