Examples of Profit Maximization (2024)

By Tyler Lacoma Updated March 08, 2021

Profit maximization seeks to find new methods to increase net revenue for a business, often without relying on increased demand or changing sales prices – although these are also viable strategies. As a result, many profit maximization strategies seek out new efficiencies or potential savings on current operations.

Reducing Cost of Goods Sold

One of the most popular methods to maximize profit is to reduce the cost of goods sold while maintaining the same sales prices. There are many different ways to do this, allowing businesses to pick the easiest or the one with the most room for change. Examples of profit maximizations like this include:

An important profit formula for this process is Marginal Cost = Marginal Revenue. If Marginal Cost equals Marginal Revenue, then the cost of producing one more unit is equal to the revenue gained by selling one more unit. Thus companies know if they can adjust the Marginal Cost so that it becomes less than Marginal Revenue, they can realize additional profit even without increasing production, making this a common goal, according to the Intelligent Economist.

This simple formula can also be used to analyze potential profit in other scenarios, such as extending work hours or hiring additional sales personnel. In any examples of profit maximization, the Marginal Cost of the change must be equal to or less than the Marginal Revenue that will come from it.

Finding New Production Efficiencies

Production facilities can also seek profit maximization through new efficiencies so that it costs less to produce the same or more products, increasing profit margins.

Two standard methods work. The first method is to upgrade equipment and technology in a factory so that materials are used more efficiently or the equipment doesn’t cost as much to run and maintain.

The second method is to increase production numbers so that production volume scales up faster than the costs of production. The factory can then produce more for less, thanks to economies of scale, explored in-depth by the Corporate Finance Institute. Many large factories with efficient, high-volume production choose this option. However, it’s important to have confident predictions of demand so that the business knows these additional products will have buyers.

While this applies primarily to production, other businesses can use the same approach to examine their inventory management, picking and shipping costs.

Expanding Sales Windows

If a business already has surplus inventory on hand, a straightforward profit maximization strategy is to increase sales opportunities. One option is to provide an online store where customers can shop 24/7 without the need for a brick-and-mortar store to be open, maximizing product availability. Companies can also choose to improve product availability through new marketing, expanding into another region or selling overseas, although all these come with associated costs.

Cutting Overhead Costs

Overhead costs refer to the fixed expenses that a business pays to stay open, including everything from leases and insurance to utilities, building maintenance, and accounting. Companies can examine local lease opportunities to see if they can move into a building with a cheaper lease without losing business or find ways to save on energy costs.

Profit Maximization Risks

No business exists in a vacuum, and profit maximization strategies carry their own risks. For example, if a business tries to cut overhead costs by moving to a new area, they may find demand at that location is lower and end up losing business. A company that switches to cheaper raw materials may find they lose more money due to defective products and bad batches.