How to Calculate Revenue (With Revenue Examples)

Last Updated on February 21, 2022

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?

What is revenue?

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.

Net Revenue Vs Gross Revenue

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.

  • Gross revenue is all income generated from sales, without consideration for expenditures from any source. It essentially separates sales from the cost of goods sold. For example, if a cabinet maker sold a dining table for $400, the gross revenue would be $400, even though the dining table cost $150 to make.
  • Net revenue, also known as the "Bottom Line," is calculated by subtracting the cost of goods sold from gross revenue. Any costs used to manufacture or acquire a product or service are deducted, including materials, direct labor, and overheads–such as shipping, storage, packaging, rent and so on. To continue the same example, the net revenue for the $400 dining table, which cost $150 to make, would be $250.

It’s also important to understand the distinction between gross revenue and net sales.

  • Net sales is a company's gross revenue minus discounts, allowances and returns. It's typically listed at the top of the income statement, just under gross revenue. However, in some cases, it's factored into gross revenue. For example, if the same cabinet maker sold $500,000 worth of furniture last year. But, refunded $5,000 to unhappy customers, and offered $10,000 worth of discounts to seniors and students during the same year. The company's net sales would be $485,000.

How to Calculate Revenue

Gross Revenue Formula: 

The revenue formula accounting professionals use to calculate gross revenue depends on whether the company is a product or service-based business.

  • Gross revenue formula for a product-based business is:

Gross Revenue = Number of Units Sold x Average Price of Goods

  • Gross revenue formula for a service-based business is:

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:

  • If a company sold 20,000 postcards at an average price of $5 per unit.
  • Sales revenue = 20,000 x 5
  • Sale revenue = $100,000

Net Revenue Formula:

The formula for calculating net revenue is:

Net Revenue = Gross Revenue - Cost of Goods Sold

Net Sales Formula:

The formula for calculating net sales is:

Net Sales = Gross Revenue - Refunds, Allowances and Discounts

Recognized Revenue Vs Deferred Revenue

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.

  • Recognized revenue is a record of all sales regardless of whether the product or service has been delivered. As soon as the payment is made, the transaction is recorded.
  • Deferred revenue is money received in advance for goods or services that are to be delivered in the future. In accrual accounting, deferred revenue is referred to as “unearned” revenue and listed as a liability on the balance sheet. In cash accounting, however, paid, yet undelivered goods or services, are recorded as a receipt but not revenue.

Utilizing Data to Drive Your Business Forward

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:

  • Planning expenses: analyzing historical revenue data can help formulate a smart budget and plan future expenses, such as inventory, wages, and suppliers.
  • Managing cash flow: measuring revenue on a weekly or monthly basis is important for determining when to pay specific bills or heavily invest in inventory or marketing.
  • Identifying growth strategies: revenue can be used to determine the most effective growth strategies from previous years. For example, what marketing strategies were associated with major peaks in revenue?
  • Pricing Strategy: analyzing revenue against changes in your price point or monetization model can help direct future decisions regarding the most profitable price for your products or services.

How to Prevent Revenue Loss?

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?

1. Your price point isn’t right

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.

2. You don’t have an online presence

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

3. Your failing to convert the right customers

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.

4. You’re not investing enough in your brand

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.

Increase Revenue with Digital Marketing

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.

Daniel Lofaso

Daniel E. Lofaso is the Founder and CEO of Digital Elevator. He loves classic Land Rover Defenders, surfing, and is a BBQ master. Connect with Lofaso on LinkedIn

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