Discussing profit

As profit is defined as revenue minus costs, sometimes described as profit identity; in a perfectly competitive market, normal profit may be sufficient to maintain business operations for a period of time, or just barely covering financial costs, accounting profit doesn't consider opportunity cost.

A business generally makes decisions based on opportunity costs; mission, vision and values statements dominate current management thinking. I learned the hard way, neglect the values statement on even a government management job application and pay the penalty.

Previously, I worked in a tourism and retail business, where our retail sales were dominated by the actions of wholesalers. Perfect competition may be described, among other things as a market large enough to not be dominated by individual, if only.

Wholesalers dictate terms to retailers, withhold supply by refusing to open accounts in an attempt to force new competition out of business to maximise their profits. When securing supply by other means, running a loss leader to generate increased revenue also increases future bargaining power and negotiation leverage.

Wholesalers offer better terms to clients with greater purchasing power, increased volumes result in reduced prices so the longer term opportunity generated by short term profit declines builds a client base.

In our case, such loss leaders (we actually generated slight profits) on certain products generated additional revenue by attracting clients who purchased higher profit items once they become a client.