Revenue is an important metric for measuring business performance. Use these formulas and find out how to calculate revenue for your business.
When it comes to assessing business performance, there’s one figure that stands out above the rest—revenue. Obviously, money is important when running a business. Without it, your business is done.
Despite its fundamental importance, revenue is often misunderstood. Why? Because there are several different types of revenue. Accurately calculating it can be confusing. And, once you’ve finally figured it out, what do you even do with it?
Before we jump into formulas, it's important that we define revenue: the income generated through business operations across a specified time period. Revenue is known as the "Top Line" since it appears first on a company's income statement.
It may also be listed as sales on the income statement and is deemed the single most critical figure in business. With that being said, there are different types of revenue, and being able to differentiate between these is fundamental to correct accounting.
Understanding the difference between net revenue and gross revenue is important for several reasons, most notably for tax purposes. Essentially, a company’s costs are subtracted from gross revenue to calculate net revenue.
It’s also important to understand the distinction between gross revenue and net sales.
The revenue formula accounting professionals use to calculate gross revenue depends on whether the company is a product or service-based business.
Gross Revenue = Number of Units Sold x Average Price of Goods
Gross Revenue = Number of Customers x Average Price of Services
You may also see these expressed as the sales revenue formula. Here’s how it’s used:
The formula for calculating net revenue is:
Net Revenue = Gross Revenue - Cost of Goods Sold
The formula for calculating net sales is:
Net Sales = Gross Revenue - Refunds, Allowances and Discounts
There are several pitfalls in using gross revenue to assess the health of a business, especially subscription-based companies. These businesses regularly receive payments for goods or services in advance (e.g. before it's been delivered or received). That's why it's important to distinguish between recognized and deferred revenue.
Calculating your revenue properly can provide direction for your business, especially when it comes to budgeting. You should take a close look at both your revenue when:
Many start-ups and small businesses have trouble maintaining a positive net revenue. There are dozens of problems and hidden costs that can eat into your bottom line without you even realizing it. The losses may be small at first, but 12 months down the line, your business can be hit hard.
That’s why it’s critical to identify the reasons why your business isn’t making money early. The quicker you find the crack, the faster you can repair the leak. So what are some of the reasons you’re losing money and what can you do about it?
It can be difficult to determine the perfect price for your products or services. Sure, a higher price tag can lead to a chunkier profit margin. But it can also push customers away. On the other hand, strategically dropping your prices may entice more buyers. The reward is a higher gross revenue, but it comes at a cost: lower margins per unit.
Cutting costs might work for large companies who can afford to operate with minimal margins due to higher sales volume and lower production costs. But dropping prices is risky for start-ups and small businesses, especially since it’s a challenge to raise prices in the future.
It can also erode the value of the market once competitors catch on and begin dropping their prices too. To help get the price right, conduct a market analysis, study your competitors, and utilize customer data to test different price points on each audience segment.
These days, almost everyone is online. So, if someone wants to find a new business to buy from, where do you think they’ll start their search?
If your products or services can't be found online, you can be missing out on a lot of customers. That's why every business needs an online presence. Even if you don't sell products online, an SEO-optimized website will help people discover your business and can help you appear higher in search results. Your online presence shouldn't begin and end with a website.
To make the most out of the world wide web, create social media accounts and keep them updated with fresh and engaging content. Social media is a brilliant way to show off your products, generate interest in upcoming events, and build a loyal brand following.
Your online presence also plays a critical role in generating social proof. Customers seldom buy from brands they don't trust. So, encourage customers to leave reviews on your website, social media or industry-specific review sites.
Today, it’s also pivotal that you claim your business on Google. Over 90% of online searches begin on Google and 46% of those searches are people looking for local companies. By updating your business details on Google, you make your business easier to find.
Check out our SEO ROI Calculator to learn more
Plenty of clicks but no conversions? A strong SEO-strategy can generate loads of website traffic. However, for some businesses, an increase in website traffic doesn’t always equate to sales.
For example, say you’re getting a respectable 10,000 visitors to your website every day. However, your competitor is also hitting around the same mark. The key difference—conversion rate. You’re converting roughly 2% of your traffic. Your foe? Around 5%.
Let’s put that into numbers. Say you both sell a similar product for $50. Based on the conversion rates above, your gross revenue is $10,000 a day from 10,000 visitors. Your competitor? They’re pulling in $25,000 a day.
You can see the difference. If this sounds like you, it may mean that you’re targeting the wrong keywords with your content marketing or pay-per-click advertising. When selecting keywords, it’s important to look at the intent behind the search term. For example, the keyword “time management tips” implies that the user is looking for informative advice and strategies. These kinds of keywords can generate traffic and build brand awareness, authority and trust. Although, your content marketing strategy shouldn’t focus solely on generating traffic—it needs to be about conversion.
Now, let's examine the keyword "time management tools." It may have a lower search volume and higher competition. But, that doesn't necessarily mean it's a bad keyword. Once you take a look at the intent behind the keyword, it's clear that the person is searching for a tool, such as an app or software, that they'll potentially pay decent money for.
Keywords like this are much more likely to generate a sale and should be integrated into your website.
Revenue losses can also be tied to poor branding or a weak value proposition. Ultimately, this comes down to knowing your target market. You may want to start by revising your buyer personas. It’s common for most businesses to have two or three hypothetical avatars based on your target demographic and existing customers.
Each may include basic information like age, location and income, in addition to specifics like needs and problems. However, in order to really hone in on your target audience, you need to conduct extensive market research.
Gathering data through customer surveys and competitor audits will enable you to clearly identify key contact points for each market segment and pinpoint the features of your products or services that appeal to them most. Essentially, you’ll have a clearer picture of your unique selling points and how to prominently express these on your website and packaging with the right brand image, voice, positioning and personality.
Getting your messaging right will increase conversions and prevent future revenue losses. After all, there’s no point pouring money into any form of advertising (digital or print), if people don’t like what they see or aren’t familiar with your brand. In fact, when scanning through search results 70% of consumers click on brands they know.
Investing in experienced graphic designers, photographers and copywriters can give your brand image the facelift it needs to appeal to the right customers. Whether it’s your website or your packaging, the imagery and the words need to portray exactly what your brand is all about.
Bad accounting practices and poor pricing models can be to blame for revenue losses. But if you’re really looking to consistently increase revenue and build a sustainable business, the tried and tested method is strategic marketing and advertising.