Factors That Affect Business Profitability
Profits are the life-blood of a market economy. Achieving a sufficiently high level of profit is crucial in sustaining long run business growth. What strategies can businesses adopt to improve their profitability?
Factor Affecting Profit
· Degree of compition
The degree of competition a firm faces is important. If a firm has monopoly power then it has little competition ,therefore demand will be more inelastic .this enables the firm to increase profits by increasing the price.However government regulation may prevent monopolies abusing their power.
· Market Compitition
If the market is very competitive then profit will be low .This is because consumers would only buy from the cheapest firms.
· Market Contestability
Market contestability is how easy it is for new firms to enter the market.if entry is easy then other firms will always face threat of competition,even if it is just “Hit and run compition”This Will reduce profits.
· Strength of Demand
Demand Will be high if the product is faishionable
Eg.mobile phone companies.
· State of the Economy
If there is economic growth then there will be increased demand for most products especially luxury products.
· Successful Advertising
A successful advertising campaign can increase demand and make the product more inelastic,however the increased revenue will need to cover the costs of the advertising.sometimes the best methods are word of mouth.
If there are many substitues or substitues are expensive then demand for the product will be higher.Similarly complementary goods will be important for the profits of a company.
· Degree of costs
An increase in costs will decrease profits ,this could include labour costs,raw material costs and costs of rent For example,
1. A devalution of the exchange rate would increase cost of imports therefore companies who imported raw materials would face an increase in costs.
2. If the firm is able to increase productivity by improving technology then profits should increase.
· Price Descrimination
If the firm can price discriminate it will be more efficient.this involves charging different prices for the same good,so the firm can charge higher prices to those with inelastic demand.