The Goal of Pricing, or Why Profit Maximizing is a Good Thing


Pricing, like most other activities in an organization, is subordinate to the company’s goals. And while every business has a different purpose – from making as much money as possible to promoting socially responsible causes – no company can lose money indefinitely and remain a going concern. That makes turning a profit vital, and the more profitable the enterprise, the more of its aspirations it can achieve. Thus, to the extent it does not conflict with the company’s purpose, the goal of Pricing within an organization should be to maximize the business’ profit. (In fact, that should be the goal of most other activities in which the company engages.)

Of course, it is possible to engage in business practices that maximize profits in the near term while causing long term damage. Many discounts, for instance, simply cause buyers to move up their purchases, resulting in greater profits today but lower profits when measured over a longer period of time. Similarly, raising prices can increase the profit on a particular product every week for 3 months, but prevent the company from achieving quarterly volume targets which would have resulted in sales support from the manufacturer. Therefore, to the extent possible, companies should keep the long run firmly in mind when doing their pricing.

While this focus on Profits may seem mercenary and self-serving, it is usually also in the best interests of the various stakeholders of the company, including its customers. For example, in many cases, the price of a product may be “too high.” When that happens, setting the profit maximizing price will result in lower prices, and more customers being able to buy more product. This would increase the proverbial Economics 101 consumer surplus.

On the other hand, when prices are “too low,” setting the profit maximizing price would result in a price increase. Unless this is because the company is exploiting monopoly profits, this too could benefit customers overall (even if some customers are priced out of the market in the process). Most companies focus more on products and product lines which are more profitable. Products that are not profitable get neglected, and the company will often even have shortages at the “too low” price. At the profit maximizing price, the company will be more focused at meeting the demand for the product or its alternatives.

Pricing in a way that maximizes profit – again, provided it is not through taking advantage of monopoly power – tends to benefit the company, its employees, and its customers.


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