profit margin

Examples of profit margin in the following topics:

• Marginal Analysis

  • In the marginal analysis of pricing decisions, if marginal revenue is greater than marginal cost at some level of output, marginal profit is positive and thus a greater quantity should be produced.
  • Alternatively, if marginal revenue is less than the marginal cost, marginal profit is negative and a lesser quantity should be produced.
  • At the output level at which marginal revenue equals marginal cost, marginal profit is zero and this quantity is the one that maximizes profit.
  • Since total profit increases when marginal profit is positive and total profit decreases when marginal profit is negative, it must reach a maximum where marginal profit is zero.
  • In this case, marginal profit plunges to zero immediately after that maximum is reached.

• Profit

  • An alternative perspective relies on the relationship that, for each unit sold, marginal profit (Mπ) equals marginal revenue (MR) minus marginal cost (MC).
  • Then, if marginal revenue is greater than marginal cost at some level of output, marginal profit is positive and thus a greater quantity should be produced, and if marginal revenue is less than marginal cost, marginal profit is negative and a lesser quantity should be produced.
  • At the output level at which marginal revenue equals marginal cost, marginal profit is zero and this quantity is the one that maximizes profit.
  • Since total profit increases when marginal profit is positive and total profit decreases when marginal profit is negative, it must reach a maximum where marginal profit is zero - or where marginal cost equals marginal revenue - and where lower or higher output levels give lower profit levels.
  • Recall formulas for calculating profit maximizing output quantity and marginal profit

• Transfer Pricing

  • Each of these locations are a division of the company that has to meet their own profit margins.
  • The firm must set the optimal transfer prices to maximize company profits, or each division will try to maximize their own profits leading to lower overall profits for the firm.
  • Double marginalization is when both divisions mark up prices in excess of marginal cost and overall firm profits are not optimal.
  • From marginal price determination theory, the optimum level of output is that where marginal cost equals marginal revenue.
  • From marginal price determination theory, the optimum level of output is where marginal cost equals marginal revenue.

• GE Approach

  • These factors can include such things as market size, market growth rate, and market profitability.
  • Other factors that should be considered include relative cost position, profit margins, innovation, quality, financial resources, and management strength.

• Undifferentiated Targeting

  • The number of consumers exhibiting a need for the identified product must be large enough to generate satisfactory profits.
  • Two other considerations are important: the per unit profit margin and the amount of competition.
  • Bread has a very low profit margin and many competitors, thus requiring a very large customer base.
  • A product such as men's jockey shorts delivers a high profit but has few competitors.

• Determining a Budget

  • How much profit is likely to be generated for each dollar spent on advertising?
  • A company's advertising budget depends on various factors such as profit objectives, target market, business age, and industry.

• Other Pricing Strategies

  • Pricing strategies for products or services encompass three main ways to improve profits.
  • The business owner can cut costs, sell more, or find more profit with a better pricing strategy.
  • The limit price is often lower than the average cost of production or just low enough to make entering not profitable.
  • The goal of such a policy is to realize a large sales volume through a lower price and profit margins.
  • By controlling costs and reducing services, these firms are able to earn an acceptable profit, even though profit per unit is usually less.

• Profit-Maximization Pricing

  • Profit maximization analysis is the process by which a firm determines the price and output level that returns the greatest profit.
  • Profit maximization is the short run or long run process by which a firm determines the price and output level that returns the greatest profit.
  • The profit-maximizing output level is represented as the one at which total revenue is the height of C and total cost is the height of B; the maximal profit is measured as CB.
  • This output level is also the one at which the total profit curve is at its maximum.
  • A firm may also take the perspective of marginal revenue and marginal cost, which is based on the fact that total profit reaches its maximum point where marginal revenue equals marginal cost.

• Break-Even Analysis

  • A profit or a loss has not been made, although opportunity costs have been "paid", and capital has received the risk-adjusted, expected return.
  • If the business sells more, it will make a profit.
  • The quantity (P - V) is of interest in its own right, and is called the Unit Contribution Margin (C).
  • It is the marginal profit per unit, or alternatively the portion of each sale that contributes to Fixed Costs.
  • It helps to provide a dynamic view of the relationships between sales, costs, and profits.

• Marketing Performance Metrics

  • The purpose of metrics such as ROMI is to measure the degree to which marketing spending contributes to profits.
  • [Incremental Revenue Attributable to Marketing * Contribution Margin (%) - Marketing Spending] / Marketing Spending ($)
  • Short-term ROMI measures revenue such as market share, contribution margin or other desired outputs for every marketing dollar spent.
  • Marketing return on investment (ROI) is another term that refers to measuring company sales and profits.
  • This reflects the idea that marketing campaigns may have a range of objectives, where the return is not immediate sales or profits.