Profit Maximisation vs. Revenue Maximisation

I’ve been reading ahead in my A-level economics syllabus and was fascinated by the topic of business objectives. Businesses have two main goals: revenue maximisation and profit maximisation. Revenue maximisation is when a business employs strategies to increase its sales to the highest attainable level. Profit maximisation refers to activities involved in the company’s effort to boost net profit to the highest possible degree given the firm’s available resources. Different roles within a firm focus on either profit or revenue maximisation.

The primary responsibility of a marketing or sales manager is to achieve sales targets over a given time period. In addition to achieving sales targets, a sales manager is expected to maximise sales to provide growth for the business and increase its profit margins. Profit maximisation is a task that is pursued by the general manager or CEO. That person is the one who is in control of all aspects of business operations. He must plan, organise, direct and control all business resources to earn the highest attainable net profit in order for the firm to not become insolvent.

I partially agree with the idea that revenue maximisation is a more realistic and achievable business objective than profit maximisation. To achieve revenue maximisation, a business must concentrate solely on revenue transactions and this can be accomplished by employing various sales strategies and programs. Profit maximisation entails a more complex program of business plans and activities that does not concentrate on sales alone. It encompasses both revenue and expenditure. A business manager must increase revenues, decrease costs or do both to increase net profit. However, it can be argued that profit maximisation in the long run is essential for a business to stay afloat.

On the other hand, when looking at a business’ objectives in the short run, their number one priority would be revenue maximisation. Revenue is the total number of sales being made a business. By maximising this, a business would be able to grow a larger customer base, which would consequently lead to the firm obtaining a larger market share. This would be beneficial to the business when their main goal becomes profit maximisation, as having a strong share of the market makes it easier to increase prices or reduce expenditure (in order to increase profit margins).

For example, a firm which has a large market share would be able to get good deals from suppliers and would therefore be able to use economies of scales to produce more for a lower price. This therefore reduces expenditure and also means the firm can increase revenues as they have a higher level of production, there being able to maximise profits. However, this depends upon the type of business. A small business with minimal financial investments might struggle to sustain their business activities without healthy profits. Furthermore, a business with many shareholders may also put focus on profit maximisation in order to provide large dividends for them.

How do Google make their billions?

I was recently asked a question concerning Google. How do Google make their billions when their core service (their search engine) costs nothing for users? As of 2018, Google is the third most valuable brand in the world with a brand value of $120.9 billion. Although this figure has increased from last year by 10%, Google has been overtaken by Amazon and Apple in the rankings of most valuable brands in the world (where Google was number 1 in 2017). But how are Google able to compete with such large companies. The answer to this is advertisements.

Approximately 85% of Google’s revenue is generated through their advertising platforms. Next time you search for something on Google, you may notice several ads on the results page. These are essentially Google’s “money-makers”. Google’s two main platforms for advertising are Google Adsense and Google Adwords. Search engines can generate money from ads by working through a “pay-per-click” scheme, where they are paid a percentage of money every time someone clicks on an ad they have displayed.

Companies will bid for the advertisement rights of specific keywords or phrases that are searched on Google in order to grab the attention of their target markets. When these words/phrases are searched on Google’s search engine, the ads of the company that have won the bids will be displayed. For example, JD sports might own the rights to the keyword “trainers”, so every time someone searches a phrase like ‘new trainers’, ads from JD sports will be displayed around Google’s search results. So essentially Google earn revenue just by displaying ads from advertisers, earning more when users actually click on the ads.

However like every other wealthy business creator, the owner of Google and his team have looked for other ways to earn its revenue with successful results. An example of this is the ‘Google Play Store’ on android devices. Google receives at least 30% commission on all app sales that are generated by app developers on the Play store. The number of installations that occur on this store is increasing every day and it’s no surprise that Google’s 30% share of sales is generating an insane amount of revenue for the company. In 2014, Google reported that it had earned $10 billion from Android apps and that number is obviously a lot larger today. However apps aren’t the only thing. Google also make profits from movies, E-books and music on the Play Store.

Furthermore, Google also delved into the technology sector with particular focus in the hardware industry. Their most successful output from this business venture was the release of their line of Nexus and Google Pixel gadgets. The first gadget by Google was the Nexus one, which was released in early 2010 and the popularity of this smartphone brand increased exponentially with there being 8 new phones released in the next 5 years. However the Nexus brand was eventually discontinued in 2016 and replaced by the new Google line ‘Pixel’, which has been a great success with the release of phones, tablets and laptops.

But what next for Google? It’s almost certain that the new innovations from Google will not stop here with the brand showing glimpses of their future projects involving robotics, self-driving cars and even space exploration. Maybe these new business ventures can help get Google back into that number one place in the rankings for most valuable companies.