Posted by Pat Raskob

How to Maximize Profits & Minimize Liabilities in a Competitive Market

How to Maximize Profits & Minimize Liabilities in a Competitive Market

Companies can take different approaches to maximize profits or minimize losses in a competitive market depending on organizational strengths. While product differentiation and low prices can be key to maximizing profits, controlling costs, getting good tax returns, and maintaining market share can be more important in minimizing losses. Long-term losses will weaken its capital position and reduce its liquidity, no matter what a company's assets and how much money it has.


Product differentiation

Companies that can differentiate themselves by offering high-quality products or services can often charge higher market prices. While price alone does not guarantee profits, it does provide an opportunity for businesses to maximize their profits. All things being equal, no matter what price companies charge for the superior quality of their products or services, more profit can be expected. The differentiation strategy only works if companies have a target market in which customers are less price-sensitive but are more quality conscious than customers in other markets.


Low-Cost Strategy

Market customers are not homogeneous. When clients are looking for products or services with basic functionality at competitive prices, the companies that serve those customers can adopt a low-cost strategy; when the demand for a product or service is extremely elastic, the lower the price, the higher the demand. While businesses should have lower revenue per unit at a lower price, a much higher sales volume will result in a higher overall profit. The ability to have mass production and extensive distribution is the key to a successful low-cost strategy.


Cost Control

Sometimes companies can suffer losses not because of a lack of turnover but because of cost overruns. Controlling costs is an important step in minimizing losses. When businesses can operate at a constant level of low costs, they will be better able to absorb any drop in prices or market recession and remain profitable. The lower the cost, the higher the profit margin. If the cost increases to a level that results in a low-profit margin, companies become vulnerable to any price shock or deterioration in sales and can suffer large losses.


Maintain market share

Companies with anemic sales are unlikely to be profitable. While the revenues from each sales unit may be sufficient to replace the variable unit cost and generate some unit profit, companies rely on the accumulation of unit profits from multiple sales units to fully cover the fixed costs and make the profit equality. Without sufficient sales volume to maintain a required level of market share, businesses may not be able to cover all fixed costs and overheads. To minimize losses, companies should aim to achieve a balanced sales volume while maintaining a satisfactory level of market share.


Maximize revenue vs. profit maximization

Unless you are a philanthropist who runs a nonprofit organization, your main motivation for business is to generate a healthy income. However, how you do it will depend on many factors, such as the size of your business, the industry you work in, your profit margin, and sales volume, which vary from business to business. What entrepreneurs and managers share, whatever their particular situation, is the desire to make the best use of available resources. There are two competitive strategies you can use to improve the performance of your business: Maximize Profits and Maximize revenue.


Profit Maximizers

Profit maximization businesses aim to create as much income or net profit as possible from currently available resources and market share. This may seem like a logical goal for all businesses. However, a business that focuses exclusively on maximizing profits may miss opportunities that provide immediate financial returns but offer long-term benefits.


Income maximizers

Companies that focus on maximizing revenue, on the other hand, are more interested in controlling market shares than the current profit margin of their sales. This is a typical strategy of companies entering a new market and well-established companies marketing a new product. This approach is particularly suited to large competitive markets, with a clientele that is very price sensitive.


Profit maximization strategies

Companies that maximize their profits use cost controls and high-profit margins to increase their profitability. These companies focus on keeping costs as low as possible by raising prices as high as possible before customer loyalty drops enough to affect profits. A classic strategy of profit maximization is the low price. This involves the price of artificially high priced products and services and their sale, to not price sensitive customers. Companies that sell luxury items, such as expensive perfumes and designer clothes, to small but affluent customers, often use profit maximization strategies.


Strategies to Maximize Income

On the other hand, revenue-maximizing companies try to open up their products or services to as many customers as possible, reducing costs, capitalizing on economies of scale, and reducing profit margins. A typical pricing strategy for maximizing revenue is the penetration price. This strategy sets an artificially low price for services or products to attract new price-sensitive customers. This strategy is particularly suited to low volume, low-cost products such as staples and popular electronics.


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Pat Raskob
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