SALES MAXIMISATION

Introduction :

Sales Maximization is the main objective of firms in modern economy. Not all economists agree with the traditional view that profit maximization is the objective of the business firm. According to prof. Baumol of price ton university the objective of a modern firm is sales maximization with profit constraints.

Firms prefers maximization of sales revenue for various Reason: 

1. Financial institution evaluate the success and strength of the firm in terms of rate of growth of its growth.
2.Empirical evidence shows that the stock earnings and salaries of top management are correlated more closely with sales than with profit.
3.Increasing sales revenue over a period of time gives prestige to the top management, but profit are enjoyed only by the shareholders.
4. Growing sales means higher salaries and better terms. Hence sales revenue maximization results in a healthy personal policy
5.Large and increasing sales help the firms to obtain a bigger market share which gives it a greater competitive power.

Assumption :

1. Sales maximization goal is subject to  minimum profit constraint. Prof. Baumol does not give a clear definition of minimum profit. It may be defined as the “ the funds to pay some satisfactory rate of dividends, to reinvest for growth and ensure financial safety”.
2.Advertisement is a major instrument of sales maximization i.e., advertisement will shift the demand curve to the right.
3.Advertisement cost are independent of production cost
4.Price of the product is assumed to be constant.

Observation :

       Baumol’s model of sales maximization is an alternative to the principle of profit maximization.

Conclusion :

Baumol’s explanations has more implications than the traditional profit maximization principle. His theory is more consistent with observed behavior. In the traditional theory changes in fixed costs do not influence output or prices except for fixing the break even point. But according to Baumol a firm which experiences any increase in fixed cost will try to reduce them or pass them onto the consumer in the form of higher prices, through large sales. This theory also establishes that business men may consider non-price competition through sales maximization to be the more advantageous alternative.