Company’s primary task is to earn income for its owners as well as shareholders while some companies strive to achieve quick profits for its owners and shareholders while some companies strive to create long term wealth for its owners and shareholders. A company can follow either profit maximization strategy or wealth maximization strategy depending on company’s long term objective and if you are one of those people who gets confused between the two terms than you should first look at the differences between profit maximization strategy and wealth maximization –
Profit Maximization VS Wealth Maximization
Meaning
Profit maximization as the name suggests refers to that strategy in which company strives to achieve maximum possible profit by selling the goods or service at highest possible price at the same time ensuring that cost of production is kept low whereas wealth maximization refers to that strategy in which company strive to increase the value of the business in the long term even if it involves sacrificing profits in the short term.
Exploitation
In the case of profit maximization strategy there is exploitation of consumers as company charges higher price than normal for its products and also there is exploitation of employees of the company because in a bid to keep costs minimum company do not provide employees facilities and remuneration they deserve but as far as wealth maximization strategy is concerned it does not exploit consumers as well as employees because if company wants to survive for long term then it should keep both consumers as well as employees of the company happy.
Pricing of Product and Service
Suppose a company launches product and the goal of the company is profit maximization than company will charge the highest possible price for its product at the same time sacrificing on the quality of the product due to cost saving principle of profit maximization but if the goal of the company is wealth maximization than it will price the product keeping in mind customers interests which in the long term will help the company in creating goodwill in the minds of the customers and satisfied customers are the best brand ambassadors of the company.
Example
Suppose there are two companies company A and company B while Company A follows profit maximization strategy and it buys substandard raw material in a bid to reduce costs but due to low quality raw material the product lasts for only 1 year while Company B follows wealth maximization and it buys the best possible raw material and due to company using good quality raw material product of the company lasts for 5 years then as far as customer is concerned they will next time buy products from Company B and not from Company A.
Goals
Profit maximization works on short term goal because in the short term company following this strategy may enjoy good profits which in turn will lead to an increase in share price of the listed company for short term but in the long term company will suffer whereas wealth maximization focuses on long term goals and its primary objective is not to increase the profits rather its objective is to increase the overall value of the company in the long term both for owners as well as shareholders of the company.
As one can see from the above differences that both are different concepts and companies at the outset should be clear which strategy is best suited for the company as it may be possible that one strategy which is good for one company may prove to be a disaster for other company.