Sales Maximization Theory

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  • 0:00 What Is Sales Maximization?
  • 0:57 Baumol's Theory of…
  • 2:28 Downfalls of Sales…
  • 3:06 Lesson Summary
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Lesson Transcript
Instructor: Ashley Johns

Ashley has taught college business courses and has a master's degree in management.

Have you ever wondered why businesses mark up their prices so much instead of just selling more? If so, you may want to learn about sales maximization. Let's take a look at this business approach and some of its pros and cons.

What Is Sales Maximization?

Say that you're a restaurant owner who recently thought up a new drink to be served in the restaurant. You know customers will love it, but you need a way to get them to try it. You can give away free samples, but how much can you afford to give away? You need a way to get this product out to as many customers as possible without losing money. This is a great opportunity for you to use sales maximization.

Sales maximization means to make the most sales revenue possible without the business taking a loss. It's a fairly logical business approach. After all, businesses generally want to make as much revenue as possible with as little cost as possible, which can lead to greater profits. In the case of your restaurant, one way to utilize sales maximization might be to offer your new drink to customers at cost until you've got them hooked on the new product. Then, you increase the price a little at a time until you make a profit.

Baumol's Theory of Sales Revenue Maximization

Baumol's theory of sales revenue maximization was created by American economist William Jack Baumol. It's based on the theory that, once a company has reached an acceptable level of profit for a good or service, the aim should shift away from increasing profit to focus on increasing revenue from sales. According to the theory, companies should do so by producing more, keeping prices low, and investing in advertising to increase product demand.

The idea is that applying this sales revenue maximization model will improve the overall reputation of the company and, in turn, lead to higher long-term profits. The theory is said to touch every aspect of a business, even employee morale. After all, when employees feel like they are working for a successful company due to increased revenue, they are likely to provide products and services at a higher quantity and quality. And with revenue increase comes profit increase, allowing for increased earnings for employees.

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