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The success of a business revolves around numbers. Although it’s also important to make sure your organization contributes real value to the community, numbers will determine whether or not you can continue fulfilling their purpose. One of the most basic things that any business owner must know is total revenue.
In this article, you’ll learn a lot of different things, including what total revenue is, how it is calculated, what it tells you, and much more. If you’re not happy with your existing business revenue, we also include various ways by which you can improve it.
Also known as gross revenue, total revenue is how much money your business makes within any given time period. Most of the time, it will come from sales.
We will work under this assumption as we move forward in this article.
But even though it’s rare, the total revenue can also include dividends, donations, and lawsuit settlements. In general, the higher your total revenue, the better it is for your business.
Meanwhile, a lower total means the opposite. Depending on other factors, it can be an indication that you should reevaluate sales strategies.
Calculating your total revenue is a pretty straightforward process as it only involves two elements: quantity and price.
Although it’s not the most accurate way of assessing sales performance, it’s a great option if you just want to run the numbers quickly.
Despite this shortcoming, learning how to calculate total revenue is important, as you can still use it in calculations that can give you a deeper understanding of how well you’re doing.
You’ll see this in action when you learn about marginal revenue in the next sections.
To calculate total revenue, just follow this formula:
Quantity x Price
Yes, it’s that simple!
Let’s say that your business sells shirts for $10 each. $10 would be your price. And for the entire week, you were able to sell 50 pieces (quantity).
Now, want to know how to find the total revenue? Just multiply 50 by 10!
Your total revenue for the week is $500. This can apply to daily, monthly, and yearly revenue. Just remember to use the right data.
But many mistake revenue for profit. So, if you want to know how to find the total revenue from the total cost, you won’t be able to do so in this way.
Cost (not to be confused with price) doesn’t have anything to do with total revenue. This means you can’t use it to derive the total revenue.
Both refer to the earnings of a business. But as far as economics is concerned, that’s the only similarity that they share. To illustrate, refer to the image below:
As a quick recap, total revenue means multiplying the total quantity by price. This is represented by the intersection of P and Q in the picture. The whole area it covers is the total revenue.
Now, let’s proceed to marginal revenue. It’s the additional revenue gained by selling an additional unit of the product. This is represented by the downward-sloping line in the picture.
If looking at graphs isn’t your thing, let’s go with calculations and examples.
How is total revenue calculated? If you still have questions about this, you can review what we discussed in the previous section because you also need to calculate it.
To understand marginal revenue, let’s assume that you sell sweets. In a day, you normally sell five candies for $2 each. This gets your total revenue to $10.
But because one of your regular customers wanted to share the candy with their friends, you sold a total of seven. This gets you a total revenue for that day of $14.
Marginal revenue is calculated as:
Change in total revenue / Change in quantity
Following this formula, your marginal revenue is $2 because [(14-10)/(7-5)].
The purpose of marginal revenue is to determine how much of the product you should produce. As you produce more, your total revenue will usually increase. But that doesn’t necessarily mean it’s in your best interest to keep on producing more.
When your marginal revenue and price are equal, that’s when your total revenue is at its highest.
Now that you know how you can calculate total revenue, you’ve probably tried working the numbers on your own business. So, in this section, we’ll talk about what you can do to get those numbers up.
Fortunately, there are many approaches that you can try. What will work best depends on your business model and the current state of the market.
For example, a tactic that works in the e-commerce industry may not work as well for construction.
Now that you know how to get the total revenue, see how these changes will affect your business:
Marketing is a great way to get new customers and get existing ones to buy again. So, ask yourself: what does total revenue mean for your business? If you believe that it’s worth the effort, check how these assets are performing:
This is just a shortlist that you may already have. But a marketing asset can be anything and everything that will help you if you wonder how to find total revenue numbers acceptable to your standards.
The great thing about this is that you don’t have to convince new customers to buy from you. This is much harder and more time-consuming than getting clients who already trust you to buy more from your business.
If you want your clients to spend more, ask them to. Think of the line “Do you want fries with that?” and apply it to your business.
What upsells would they potentially be interested in? Or is there a related product that would improve the impact of their recent purchase? Put yourself in your customers’ shoes.
You don’t have to wait for them to come to you. As the one needing the sales, you must take the initiative to approach your customers and remind them how much they love your product.
Let’s say you own a line of cosmetic products, and it’s been three months since this customer last bought anything. Perhaps they’d be interested in a new shade of lipstick. If you’re running a promotion right now, let them know.
Your customers make tons of decisions every day. It’s your job to make sure they don’t forget you.
The total revenue is one of the most crucial numbers that define the business. In a sense, it gives you a picture of the overall health of the business. That’s why knowing how to determine the total revenue is one of the first things that people want to learn.
But even though the number it generates provides a good starting point, it doesn’t tell the complete story. For that, you need the profit.
Calculated as total revenue-total cost, your profit tells you how much the business is making after all expenses.
Therefore, revenue itself is just one part of the puzzle. By understanding the impact of various factors on these numbers, you’ll be able to understand the financial health of your enterprise better.
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