Back in November, 2006, kids were queued up for miles outside Central London’s official Sony store.
Shivering in the cold, but tingling with excitement, the gamers were waiting for the launch of the PS3!
In just the first 24 hours, one million PS3s were bought by eager gamers.
And in the years that followed, 85 million PS3s would be shipped worldwide.
Even though Sony was selling each PS3 for a price (or average revenue) of £400… their average total cost was also £400! So they were only just making a normal profit of £0 on each unit, just breaking even to cover their opportunity cost!
Sony could have put their prices up above average cost, and made a supernormal profit…but instead they decided to keep their price to just £400, and break even at a normal profit.
You see, Sony didn’t want to make a supernormal profit on their PS3s.
They wanted to maximise their sales – they wanted to sell PS3s to as many people as possible…and once consumers had bought the playstation console, Sony planned to make huge supernormal profits by selling their playstation games at super high prices.
Tesco uses a similar strategy over Christmas. They sell their delicious roast turkeys for a price equal to average total cost…so they just make a normal profit on each turkey sold…but Tesco knows the low-price turkeys will attract millions of shoppers into Tesco stores. And once they’re inside, these shoppers will buy more expensive products which will make Tesco massive supernormal profits!
This strategy of setting price equal to average cost is known as sales maximisation. When a firm maximises its sales (without making a loss!)
Both Sony and Tesco decreased their prices to attract more sales. But they still made sure price (or AR) was equal to ATC, to avoid making a loss!
Managers and directors will often try to maximise sales, too, because their bonuses are linked to how many sales they make!
We can show sales maximisation graphically:
Sales maximisation is where AR (or price) = ATC (or just AC).
So Sony would be sell where AR intersects AC, here, with a quantity Qsales and if we stack it up like Dre stacks his money, all the way up to the demand curve, our price is Psales!
Sales maximisation is when a firm maximises its sales without making a loss. The condition for sales maximisation is AR = AC.
Sony sales maximised with PS3s so everyone would buy a playstation, allowing Sony to then cash in big time by selling super expensive games.
Tesco sales maximised with their turkeys so everyone would visit Tesco stores for the turkey, but then stick around to buy their more expensive products.
Managers and directors also like to sales maximise because it increases their bonus!
