Factors Affecting Profitability

If a company has monopoly power, it has little competition. The demand will therefore be more inelastic. This allows the company to increase profits by increasing the price. For example, highly profitable companies, such as Google and Microsoft, have developed monopoly power with limited competition.

In theory, however, government regulation can prevent monopolies from abusing their power, e.g. OFG can prevent collusion between companies (to increase the price) Regulators such as OFGEM can limit the prices of gas and electricity companies.

If the market is very competitive, profits will be lower. This is because consumers will only buy from the cheapest companies. The idea of competition is also important. Competition in the market is how easy it is for new companies to enter the market. If access is easy, companies will always face competitive threats; even if it's just a "hit and kick" match, it will reduce your winnings.

Power of the question. For example, demand will be high if the product is trendy, eg, mobile phone companies have been profitable during the period of growing demand and market growth. Low demand products such as Spam (canned meat) will result in low profits for the company. Some companies, such as Apple, have been able to build strong brand loyalty, causing customers to demand a lot from Apple's new products.

However, profits for mobile phone companies have fallen in recent years as high profits have fueled the oversupply that is offsetting the increased demand.

The state of the economy. When there is economic growth, there will be more demand for most goods, especially luxury goods with a high income elasticity of demand. For example, luxury sports car manufacturers will benefit from economic growth but suffer losses during recessions.

Commercial break. A successful advertising campaign can increase demand and make demand for the product more inelastic. However, the higher revenue should cover the advertising costs. Sometimes word of mouth is the best method. YouTube, for example, didn't need a lot of advertising.

There are substitutes, if there are many or expensive substitutes, the demand for the product will be greater. Likewise, complementary products will be important to the bottom line.

Relative costs. Higher costs will reduce profits; this can be labor costs, raw material costs and rental costs. For example, devaluation will increase import costs so that companies that import raw materials will have higher costs. Alternatively, if the company can increase productivity by improving technology, profits should increase. When a company imports commodities, the exchange rate of the kroner is important. Devaluation makes imports more expensive. However, devaluation is good for exporters who are becoming more competitive.

Economies of scale. Firms with high fixed costs need to produce a lot to take advantage of economies of scale and produce at the minimum efficient scale, otherwise average costs will be too high. In the steel industry, for example, we have seen many rationalizations where medium-sized companies lost competitiveness and had to join forces with others.

Powerfully efficient. If a company is actively inefficient, costs will increase over time. For example, state monopolies often have little incentive to reduce costs, e.g. get rid of unnecessary work. Before privatization they therefore made little profit, but with operations and marketing incentives they became more efficient.

Price discrimination. If the company can price discriminate, it will be more efficient. This means that different prices are charged for the same product, so companies can charge a higher price to people with inelastic demand. This is important for airlines.

Management. Effective management is critical to the long-term growth and profitability of the business. For example, poor management can lead to low morale, which is detrimental to customer service and employee turnover. Businesses can also suffer if they undertake the wrong expansion plans. For example, many banks take risky subprime loans, but this leads to huge losses. Tesco is expanding into unrelated businesses, such as garden centers. This causes the company to overload and lose sight of its core business.

Company goals. Not all businesses seek to maximize profits. Some companies may try to increase market share, but then profits are sacrificed to gain market share. For example, this is the strategy of Walmart and to some extent Amazon.

Exchange rate. If companies depend on exports, depreciation increases profitability. The devaluation makes exports cheaper for foreign buyers. Therefore, the company can sell more or opt for a higher profit margin. If the company imports raw materials, depreciation increases the cost of production.