How to Calculate Revenue Maximization

Three Steps to Revenue Maximization

1. Determine who your customers are. A convenience store’s customers might consist of people driving by the store. Our convenience store owner should determine the distinct characteristics of these customers. Are they travelers or commuters? What is their most frequented destination? Travelers driving to Wichita, Kan., might have different needs than morning commuters going downtown. Most customers would not drive too far out of their way to find a convenience store, location is extremely important for maximizing revenue.A clothing store’s customers might also consist of foot traffic, but potential customers could be anyone attracted to the store’s styles. A clothing store owner would want to determine gender, age, size, and cultural preferences of customers. The owner could then purchase a mailing list from a marketing firm to send out catalogs.

2. Determine the most effective advertising media. Communicating with your customers requires learning when and where they might want to purchase your product. Our convenience store owner may determine that his customers purchase his product while driving in their cars. He might benefit most from purchasing billboard advertisements.Our clothing store owner might determine that her customers are career-minded women in their mid-20s. She learns that over 50 percent of this demographic group has a Facebook page. Therefore, she might create a Facebook page for the store, or, purchase advertising space from Facebook.Most businesses, regardless of what type of advertising is chosen, should set up a website where customers may find out more information about your product. Other types of media are radio, newspaper, television, email, and telemarketing.

3. Determine the right price for your product. Determine how much control you have over the price of your product. This requires defining your competitive market. There are four types of competitive markets: monopoly, oligopoly, monopolistic competition, and perfect competition. Monopolies exist when there is one supplier. In many communities, the local power company may be the only option for electricity, meaning that the power company has a monopoly over that market. An oligopoly is when there are few suppliers in the market. One example of an oligopoly is the cola industry. While there are several smaller suppliers, the market is dominated by Pepsi and Coca-Cola. Monopolistic competition is an industry where there are many suppliers with slightly differentiated products. The t-shirt industry is an example of monopolistic competition. There are many t-shirt companies that sell t-shirts with slightly different features. Perfect competition is an industry where there are many suppliers selling identical products. An example of perfect competition is the stock market. A share of Microsoft stock is the same product no matter who the stockbroker is. The lone company in a monopoly has the most control over its price, while the company participating in a perfectly competitive market has virtually no control over price. Most companies fit in a monopolistic competitive market.Our convenience store owner participates in a market close to perfect competition. While he might be able to distinguish his store slightly from his competitor across the street by offering cleaner bathrooms and homemade cinnamon rolls, he cannot price his fuel higher, as customers do not differentiate this product.However, our clothing store owner, who participates in monopolistic competitive market, must do more research to determine the best price for her products. She can research competitors with similar customers and products to determine best price, or she can test the market by offering different prices for the same item to determine which price maximizes sales dollars.