How To Calculate Revenue? Examples and Tips to Increase Revenue
By Sam Nguyen
Drive 20-40% of your revenue with Avada
If you understand revenue, you understand your business, then you can grow your business successfully.
Revenue is the most basic metric for any organization. However, it’s barely understood thoroughly. First and foremost, there is more than one sort of revenue. Secondly, recording it and measuring it are getting more difficult as your business scales up. And thirdly, once you’ve calculated it, you must know what to do next.
Hence, this article How To Calculate Revenue? Examples and Tips to Increase Revenue would be helpful for you and your business. Keep reading to get all this useful knowledge!
What exactly is sales revenue?
Definition
Sales revenue refers to the income gained by any business entity by selling their products or offering their services during the ordinary course of its working operations. Sales revenue is often reported on a monthly/quarterly/annual basis as the case can be in the Income Statement.
Examples
Example 1
Take a look at the example of a tyre manufactured which generated 25 million tyres across numerous vehicle segments in the year 20XX. Throughout the year, 10 million tyres were sold at an average price of $80, 10 million tyres at an average price of $125 and 5 million tyres at an average price of $200 across multiple segments of vehicle. Calculate the revenue for the company.
Sales = Number of units sold * Average sales price per unit.
Total revenue = $3,050,000,000
Example 2
Given that there is a mobile manufacturing organisation. During the 12 months ending in November 2018, the monthly sales volume of the company has accelerated from 1,500 to 6,500. The price function during every month is adjusted by the function (7000 - x) in which “x” is the number of mobiles sold during the month.
Notice that during March 2018, the quantity of mobile sales volume was 2,900. Determine sales in March and November 2018.
According to the above information, the monthly sales revenue can be measured as following:
Monthly sales = x * (7000 – x)
Monthly sales = 7000x – x2
The mobile sales stood at 2,900 units during March 2018, then the monthly sales in total in March 2018 can be measured as below:
Monthly revenue March 2018 = 7,000 * 2,900 – (2,900)2
Monthly revenue March 2018 = $11,890,000 or $11.89 million
One more time, the mobile sales grew up to 6,500 units during November 2018, then the monthly sales in this month can be calculated as below:
Monthly revenue November 2018 = 7,000 * 6,500 – (6,500)2
Monthly revenue November 2018 = $3,250,000 or $3.25 million
Why is calculating revenue important to business?
Revenue is very significant when you analyze financial ratios such as gross margin (revenue-cost of products sold) or gross margin percentage (gross margin/revenue). This ratio is utilized to measure how much a business has left over after the cost of the merchandise is subtracted.
Businesses can be nearly artistic with how they deal with their top line. For instance, if they would like to reduce the cost of their merchandise so that their top-line margins would be larger, they could hire the merchandise or provide it at a premium. Applying that method would generate a higher net revenue than if they just sell the goods or services at its base cost.
How to calculate sales revenue?
- Step 1. First, define the number of units produced and sold during a certain period of time, say annually.
- Step 2. Second, because the number of units manufactured drives by demand which creates the basis of the function for the price, let’s assess the sales price on average per unit.
- Step 3. Third, to calculate the revenue, multiply the number of units sold (step 1) and the average sales price per unit (step 2).
What to do with revenue data?
Measuring revenue properly is the compass by which you can manage your whole company. It shows the possibilities you can catch (or what serious evasive action you should take to get yourself back on the right track). With the help of it, you can guide the direction of your business in a variety of ways:
Determine growth strategies
Historical revenue data can assist you in building your long-term plans for development: how much you can spend on R&D and how much you invest in property, plant and equipment.
Plan expenses
The basics. According to revenue, both immediate and future expenses (inventory, employee payment, and suppliers) can be calculated.
Analyze trends
Historical revenue data also allows you to discover customer behavioral patterns and modify operations around it.
Update pricing strategies
Understanding your revenue can help you realize whether you have been charging too little. Have you been earning enough profit versus expenses?
Some tips and advice about revenue - How to increase revenue?
Prevent loss of revenue
Your Saas company might lose revenue through customer churn, could not convert the right consumers, or poor monetization. That means you’re missing potential revenue and slowing down the development of your company.
If you lose revenue through customer churn, your Saas company will likely become a leaky bucket that cannot be refilled with any amount of acquisition. You could lose your revenue through customer churn in some cases:
Your product isn’t attracting your customers. Consumers who are not using your product are probably to churn - they don’t want to spend their money on a service that doesn’t matter to them. Your value proposition has to be very transparent to your clients. You need to ensure that you keep placing that value in front of them to help them become successful.
You aren’t interacting with your customers. You can learn a lot from customer frustrations. When you cannot listen to your consumers’ complaints, you’re missing a chance to grow. Furthermore, your discontent customers will find the answers to their problems in your competitors.
You could lose potential revenue as you failed to convert the right clients in some cases:
Your pricing page is confusing or informational. Your pricing page can be considered the gatekeeper between your prospects and conversions. The page needs to describe your plans in the clearest way and make it simple for clients to decide and convert. A confusing page could lead to losing your customers and potential revenue.
You try to incentivize conversion by providing discounts. Discounts may encourage some shoppers to convert, yet they’re probably not the ideal customers. Discounts may lower your product’s value. Hence, the clients who convert just as you’re giving a discount are less likely to recognize the value in your product. They may have a reduced Lifetime Value and likely to churn out quicker than the ideal customer.
Poor monetization can result in your huge revenue losses from current customers in some cases:
Your pricing model doesn’t go well with a value metric. Without a value metric, your customers won’t feel that the value of your product is not worth their money. These customers won’t have a version of your service that best satisfies their demands. A value metric would enable you to better monetize these clients by offering them the precise version of your service they would like to spend on.
You haven’t adjusted your prices for a long time. That means you don’t keep updated with your market’s demand and with their willingness to pay. Even though you may define your prices based on your market in the first place, needs change constantly and your pricing campaign needs to adapt. You could lose your money if you undercharge your customers and undervalue your products.
Create a strong revenue growth strategy
Building a strong, incremental development strategy refers to understanding and optimizing your beginning point and your development over time.
One component of this is to determine when your linear growth starts and create a plan for long-term development from that point. This determined starting point is named initial traction.
If you have a thorough understanding of your company, you can build a realistic plan for future development. You can be self-assured that you have a viable company that will assist continual development in the long run. You’ll get where you’re growing from, and define goals accordingly.
Don’t stress yourself by asking some questions such as when your starting point is or how high it is. You simply need to understand what you set as your initial traction so you can build plans for your development. Make decisions that will work effectively in the long run, and form a culture for your employees to invest in the company’s future.
Besides, the second component of an incremental development plan is the rate of revenue growth over time. Growth goes from net new MRR every month, which consists of new revenue from new customers and new revenue from existing customers enlarging their plans. Growth is hindered by MRR churn as customers downgrade or stop using your service.
Apprehending the slope of your development means you know how your plans are being operated. You’ll witness how quickly you’re developing and whether your net new MRR every month backs up stable growth. If you’re not developing as quickly as you want, you’ll need to find ways to improve your net new MRR.
Accelerating the rate of development over time originates from balancing the factors that affect your MRR. Concentrate on keeping customers by conveying the value they were promised and constantly enhancing your product. Work to cross-sell and upgrade your existing customers so the value they got rises over time, along with the revenue that they bring to you.
Conclusion
You see, understanding How to Calculate Revenue is really critical so that you can improve and bolster your business more in the coming years. The future of your business will begin with one simple equation.
We’re very happy to help and support you in the process of developing your business and we’re willing to answer any questions you may have. You can leave them in the comment section below.
Thank you for reading to the end of the article. Hope you guys have a beautiful day!
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