Breakeven and profitability analyses in marketing management using R software

An extensive literature in economics and business provides guidelines for profit maximization for firms in various market structures. However, these elaborate and sophisticated techniques and rules for profit maximization require appropriate estimation of a company’s cost and revenue functions that are often difficult to obtain for many companies. So for many businesses, an important practical tool for profitability analysis and decision making is often the breakeven analysis that identifies the level of price and output where a firm’s revenue equals its cost. So production and sales beyond that point generate profit. Although, breakeven analysis is easy to understand and use, its assumptions are often misunderstood or ignored resulting in its misuse. The commonly used breakeven formula in business and marketing describes a special type of perfectly competitive firm that has no pricing power, faces a horizontal demand curve, a linear total revenue curve, a linear total cost curve, and a linear profit curve that increases indefinitely. A more typical perfectly competitive firm would instead have a U-shaped (or inverted S-shaped) total cost curve, and a quadratic profit function; thus, two breakeven points, and it would reach maximum profit at the point where its marginal revenue equals its marginal cost. Such firms would not require a marketing manager since they can sell all of their production at the given market price that is determined by the market demand and supply. However, most firms operate in an imperfectly competitive market and exercise some control over the price of their products; they also control their product quality, promotion, and distribution. Such firms require marketing managers for understanding and responding to the needs and wants of their customers and these managers can utilize appropriate breakeven and profitability analyses. This article evaluates breakeven and profitability analyses for firms in perfectly competitive and imperfectly competitive markets. The conceptual and practical methods for profitability analysis are presented, and R, free mathematical and statistical software, is used to analyze various situations to guide marketing managers in their decision making. The use of this free and powerful software to facilitate analysis and decision making should empower the greatest number of decision makers all over the world. The role of product characteristics in determining product demand, pricing, and market shares is also presented here.