Revenue and sales maximisation
Maximising sales revenue is an alternative to profit maximisation and occurs when the marginal revenue, MR, from selling an extra unit is zero.
Revenue maximisation – example
In the example below a small firm produces tennis rackets, and sells them in boxes of 10 to retail stores. The table shows weekly sales. Total revenue (TR) will be maximised at a price of £50 per racket, with sales of 60 rackets, giving a total revenue of £3,000. At revenue maximisation, marginal revenue will equal zero.
Revenue maximisation graph
The condition for revenue maximisation is, therefore, to produce up to the point where MR = 0. This is also at the same level of output where PED = 1, namely at the mid-point of the average revenue/demand curve.
Sales maximisation is another possible goal and occurs when the firm sells as much as possible without making a loss.
In the example of the tennis racket manufacturer, the price necessary to maximise sales volume, without making a loss is a price of £30 per racket, where it sells 80 rackets. Although sales would increase (to 90 rackets) if the firm reduced the price to £20, it would make a loss of £700 – hence selling 80 rackets at £30 is sales maximisation point. Of course, in this example, profits are maximised at a much lower output and higher price – namely selling 50 rackets at £60 each (where profits are £900.
Not-for-profit organisations may choose to operate at this level of output, as may profit making firms faced with certain situations, or employing certain strategies. An example of this would be predatory pricing where, so long as costs are covered, a firm may reduce price to drive rivals out of the market.
Sales maximisation graph
Sales maximisation means achieving the highest possible sales volume, without making a loss. To the right of Q, the firm will make a loss, and to the left of Q sales are not maximised.