Economics Online

Revenue and sales maximisation

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Revenue 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.

P(£) Qd TR
MR
[∆TR/∆Qd]
100 10 1000
90 20 1800 80
80 30 2400 60
70 40 2800 40
60 50 3000 20
50 60 3000 0
40 70 2800 -20
30 80 2400 -40
20 90 1800 -60
10 100 1000 -80

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

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.

P(£) Qd TR
TC		 Profit
100 10 1000 1700 – (700)
90 20 1800 1800 0
80 30 2400 1900 500
70 40 2800 2000 800
60 50 3000 2100 900
50 60 3000 2200 800
40 70 2800 2300 500
30 80 2400 2400 0
20 90 1800 2500 – (700)
10 100 1000 2600 – (1600)

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.