NigCareers

You can adjust your price to maximize profit in your business.

You should not be afraid to adjust your price to the amount that helps you maximize profit. Over time, you will have a better understanding of the price that best works for you. . The essence of your business is profit maximization. Generating sales is not equal to profitability. Whatever type of business you are doing, if you are not making profits, it is just a matter of time that the business will close down. Making profits is not difficult if you perfectly understand profit equation.

What is profit equation?

In accounting sense, profit equation can be expressed using the formula below:

P          =          R – C

Where; P = Profit, R = Revenue and C = Costs.

Graphically, it can be expressed as follows:

Read Also: Understanding Margin of Safety in Business Plan

It looks simple! But that is just the reality of any business. Profit is the gap between Revenue and Costs. The wider the gap; the higher you maximize profit. That is, the higher the profit you make. As an entrepreneur, you have the responsibility of ensuring that the elements of the profit equation work to your advantage. Let’s consider each element one after the other.

Revenue

This is basically the amount you earn from selling your products or services to your customers. How can you maximize profit by increasing revenue? Revenue is a function of two variables namely price and volume. You either increase your price so that you earn more. But this might not be possible in some instances. For example, if you sell a product that has a standard price in a perfect market. It becomes almost impossible to increase your price. Otherwise customers will run away from you. Another way of increasing your revenue is to increase the volume of your sales. This might mean selling more to the existing customers. You can reach out to new customers so as to have larger market share. Granting cash or quantity to customer can be your trick for generating more sales.

Costs

Costs include the totality of the amount you incurred in bringing the products or services you sell to a sell-able state, That is, a state where your customers are convinced that the products or services can actually deliver the desired value. Of course, you should not forget other incidental costs. For instance, you will not only consider the cost of the item, you need to include other costs like transportation costs, marketing and advertising costs, sales commission etc. Therefore,in order to maximize profit, you can embark on cost reduction or cost control strategies.

Read Also: How to Evaluate Business Opportunities

If you succeed in either increasing your revenue or drive down your costs or both, you will automatically maximize your profit. People wonder why they are not making profits. The reason is simple! It is because they didn’t pay attention to these elements of profit equation. Profit will always respond to this equation. Instead of focusing too much attention on the profit, focus on the elements of the profit equation. You will see your profit level responding accordingly. This is a simple way by which you can maximize profit for your business.

Growing Your Business, Starting a Business