Revenue Maximization Curve
Price and profit do not rise together indefinitely. Raising the price improves the return per sale but usually reduces the number of buyers, creating an interior point where total profit peaks.
The highest price can produce low total profit. Push the price upward and profit may climb at first, reach a peak, and then fall—even though every remaining sale earns more.
E1Two forces pull the total in opposite directions
A price increase changes two things at once: profit per unit rises, while the pool of willing buyers contracts along the Demand Curve. Total profit depends on the product of unit profit and quantity sold. Early increases can help because the extra margin outweighs the lost sales; beyond the peak, disappearing demand costs more than the higher margin contributes. The important variable is therefore not price alone but how sharply purchasing changes at each price—the question captured by Price Elasticity of Demand.
E1The peak is not a universal price
The curve identifies an optimum only for the outcome being measured. Maximum revenue and maximum profit need not occur at the same price, because profit also depends on costs. Nor does one observed point reveal the curve: the peak must be estimated from demand at several prices.
Run a small price ladder
Choose three plausible prices for one offer, expose comparable customer groups to each, and record both conversion and unit margin. Calculate total profit at every level before deciding; do not treat the price with the highest conversion—or the largest margin—as the winner.
Episodes that teach this
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Why We Pay More Than Others? Product Pricing Psychology | Future IQ
· explained at 3:37
6,369 views
"at the highest price your total profit is low... it goes up like this and then it comes down again later"