Budding entrepreneurs and start up aspirants with big business ideas will mandatorily chalk out a business plan involving goals, strategy and budget. As a thumb rule, the basic most inherent purpose of starting a business and ensuring sustainability is “profitability”, which leads on to profit maximization being the end and sole purpose of the birth of a startup.
This may seem as a valid enough reason for many as profit is just what the doctor prescribed for business success. However, is profit the sole purpose behind a business idea? Experts believe that this may not be the case and in fact optimal profit and not profit maximization should be enough to help a business withstand the toughest tides.
The Misconception Of Profitability
Profit occurs when revenues generated are greater than cost incurred. Or in other words purchases at low rates and sales at higher cost will lead to profits for a business. What we tend to ignore at times is the fact that plenty of businesses with just enough profits have successfully survived the toughest of economic challenges, while some high profit earning businesses have crashed and failed.
An enterprise may decide to increase prices of its commodity to expand the revenue-cost differential to achieve profit maximization. However, a company may fail or succeed despite passing on rising costs to the end customer. There have been cases where rising cost of produce has deterred consumers from the product and made them shift loyalty toward cheaper commodities.
Aim For Optimum Not Maximum Profit
Profit is an absolute essential for a business to flourish and support marketing and innovation. Having said that, aiming for an “optimal” measure instead of maximum is what new ventures should aim at. Companies should work toward making enough revenue to back up the risks involved in financial activities of the business to avoid major losses and shut down.
Profitability maximization the sole goal of the company without considering other goals like customer retention, safety, service, etc. can prove catastrophic.
In the recent past, pharmaceutical, aviation and automotive industries have experienced loss and adverse management decisions owing to profit maximization taking front seat instead of other important business goals.
If Not Maximum Profit Then What?
The end goal of a business, the reason behind that mastermind idea should always be to create your target customer pool. Buyers at the end of the day decide whether or not a venture is here to stay. Generating clients and ensuring good after service to retain them should be the primary objective.
Business ventures should also look at creating and maintaining goodwill and a favorable image in the market. This goodwill can at times bring back a company from the lowest of lows if consumers have faith and belief in the commodity.
Creating employee satisfaction is also something an organization should look at when trying to make that mark in a competitive industry. Human resource and staff development is the key to a successful business as happy and content employees can completely turn around the face of a business set up.
So while “profitability” and revenue is what a new venture sets out to achieve, they should ensure that it is optimum or “just enough” profit and not maximum. An aggressive profit seeking business approach may do more harm than good if considered the end goal of a new market endeavor.