Revenue maximisation is an abstract, hypothetical goal of an organisation that seeks to maximize its revenue by all possible means. This would normally occur at the point at which the company maximises its total revenue achieved from sales of every unit sold. If the aim is to maximise revenue as a whole, then this would also imply that it should seek to minimise its cost of production i.e.
So, for the purpose of revenue maximisation, what one would seek to do is maximise the actual revenue maximised through the processes of sales and pricing. To arrive at this theoretical objective, one would have to bear in mind the two most important theoretical objectives set out by management. These are to maximise the productivity of the firm and to reduce costs. Both of these factors will have direct effects on revenue.
For example, if the firm wishes to maximise its revenue by selling as many units as possible, then its direct effort would be to improve the productivity of the sales staff. This is done by raising their efficiency so that they can increase the number of units sold per hour. The output is then maximised as a result of this increased productivity. Likewise, if the goal is to reduce costs, then reducing the number of unproductive sales or badly priced units would achieve the same end as maximising the revenue produced through revenue maximisation. Again, the output would then be maximised as a direct result of this saving.
Now that we know what revenue maximisation is, we can understand more clearly how it affects the overall performance of the firm. We now have to decide whether there exists such a thing as a curve from which the results of revenue maximisation can be plotted. This is where a company would recognise that it had achieved all of its revenue goals to date, and then begin to look for a downward trend in prices. When the prices begin to drop, this can be seen as being an indication that the company has now reached a stage at which it will need to make further improvements to the way in which it maximises revenue; otherwise, all of the previous gains will have been lost.
This brings us back to the original question: is revenue maximisation a worthwhile long-term strategy? If the results of revenue maximisation are consistently less than satisfactory, then it may not be worthwhile while trying to pursue maximisation. In most cases, the decision to pursue short-term profit maximisation may still be the best option because it will help to ensure that a company maintains a healthy cash flow. However, this does not mean that a company cannot use revenue maximisation to maintain a higher share of the market, and in that case, revenue maximisation may still be considered to be a worthwhile investment.
The curve representing the value of a company's equity is called the P/L curve. The P/L curve can be derived by plotting the actual profits made against the actual cost incurred during operations over any one-year period. In order to plot this curve accurately, you should plot the P/L curve against the S.M.A.R. index, which measures the stock price per share of the firm against the replacement cost. The slope of the line on the bottom of the chart represents the reinvestment rate. A positive slope indicates that the firm reinvests more earnings, and a negative slope shows that the firm reinvests gains very little.
Read about the Baumol’s Sales Maximisation Model and its both aspects on thekeepitsimple, and the topics which are related to the business, management and economics.
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