Revenue is a critical metric for any business, but it is rarely understood correctly. Firstly, there are different types of revenue. Second, calculating it becomes more complicated as your business grows. Thirdly, after you've calculated it, you must know what to do with it.
Here’s what you need to know about sales revenue including how to calculate, what may be impacting it and how to increase
Introduction to sales revenue
To help you understand and scale your business, you need to understand sales revenue.
Revenue is the most fundamental metric for any company, but hard for some to understand because there is more than one type of revenue. Recording and calculating sales revenue can get more complex as you grow your business. After you've calculated revenue, you need to understand how this number can help your business grow.
The difference between gross and net sales revenue
Gross sales are the value of all of a business's sales transactions over a specified period of time without accounting for any deductions. Net sales are a company's gross sales minus three kinds of deductions: allowances, discounts, and returns.
How to calculate sales revenue
To calculate the sales revenue equation, you need to know a few numbers.
First, calculate your operating revenue. Multiply the number of goods or services sold by the price you sold them for. For example, if you sell 300 pairs of shoes at $80, your operating revenue would be $24,000 (300 x $80). Do this for all the products or services you sold. Add together all your operating revenue.
Next, calculate your nonoperating revenue. Simply add together all your earnings from non-business activities.
Finally, add together your operating revenue and nonoperating revenue.
Total revenue = operating revenue + nonoperating revenue
Reasons a business might be losing revenue
1. The product isn't engaging the customers
When you wrote the business plan for your small business, you probably gave a detailed outline of your products or services and how they would attract and engage customers. Unfortunately, if revenue is slipping, you may have to revisit what you offer consumers.
2. The business owner isn't communicating with the customers
These days, customers like to put a face or personality with a business they frequent. It’s critical to keep up communication with potential and current customers through email, social media, or even personalized mailings and phone calls.
3. The pricing page is uninformative
The best pricing pages give potential customers everything they need to make a purchasing decision. Additionally, your pricing page should reduce information that might disorient, discourage ,or dissuade someone from engaging with your brand or purchasing.
4. You try to incentivize conversion by offering discounts
No surprise that discounts decrease your net revenue. However, offering discounts could help you earn more by attracting more customers and increasing sales.
5. The pricing model isn't aligned along a value metric
One of the most important concepts in pricing is the value metric. Your value metric is essentially what and how you’re charging. Determine if value metric aligns to your customer’s needs. Though you may have set your prices according to your industry niche at first, demands for your product may change over time and you need to adapt your pricing strategy. Don’t leave a large amount of money on the table by undercharging customers and undervaluing your product.
6. The prices weren't adjusted in a long time.
There are seven price adjustment strategies: Discount and allowance pricing, segmented pricing, psychological pricing, promotional pricing, geographical pricing, dynamic pricing and international pricing. This article from the Marketing Insider blog goes over each type of price adjustment strategies in detail: Price Adjustment Strategies - Adjusting Prices for Different Markets.
Tips to create a strong revenue growth strategy
If you need to improve your business growth, there are strategies to apply. Here are tried and true ways to spark a growth strategy that works immediately.
1. Establish a value proposition
Understand what sets your company, products, or services apart from the competition. Why do shoppers come to you? What makes you relevant, different, and credible? Craft these answers to explain why consumers should do business with you.
For example, some companies compete on “authority” – Zappos is the definitive place to buy trendy shoes and other fashion accessories combined with stellar customer service you just can’t get elsewhere. Determine the special benefit only your business can provide, and forget everything else. If you stray from your value proposition, you run the risk of devaluing your business.
2. Identify your ideal customer
You might have done in-depth research for your business plan, but as your company evolves, so does your target audience. Staying on top of trends in the market can help you prepare to come out on top. Don’t try to market to everyone – is your product geared towards parents, pet owners, or millennials? Target that group with your marketing efforts.
3. Define your key indicators
Key performance indicators (KPIs) help you focus on the most important performance measures. KPIs show how various parts of your business are performing. According to the QuickBooks blog, here are the 7 most important KPIs to track:
- Cash flow forecast
- Gross profit margin as a percentage of sales
- Funnel drop-off rate
- Revenue growth rate
- Inventory turnover
- Accounts payable turnover
- Relative market share
4. Verify your revenue streams
A revenue stream is simply a source of revenue of a company or organization. There are a number of different ways you can bring in money. Types of revenue streams include:
- One-time Revenues: also known as transactional revenues, where the customer pays just once for the value.
- Recurring Revenues: where the customer pays over and over to continue receiving the value, or they pay over and over to receive ongoing support for their initial purchase.
5. Look to your competition
You don’t need to reinvent the wheel when it comes to growing your business. Identifying competitors, as well as their strengths and weaknesses, can help you understand exactly how your niche is unique. Here are questions you should answer after investigating businesses both big and small:
- Who sells products or services the same or similar to yours?
- Have your competitors expanded with new products or services in the last 6 months?
- What are the strengths and weaknesses of the competition?
- What marketing and sales strategies are used by each competitor to achieve their objectives?
- How does their website look and function?
- What’s the overall market outlook in your industry?
You probably put together a competitor analysis for your business plan before launching. It’s time to revisit and look at your current industry landscape to help you come up with ways to increase revenue.
6. Focus on your strengths
Focus on your strengths instead of trying to improve your weaknesses. Often, entrepreneurs will act as a jack-of-all-trades, handling everything from marketing research, to sales, to payroll. This keeps costs low-but at a price. Recognize where your strengths lie and take things off your plate by outsourcing if you need to manage costs.
7. Invest in talent
Hiring isn’t an area where you should be thrifty. Hire the best talent and pay them fairly. Your team represents your business and should share some of your passion to succeed. If you don’t have the resources to bring on full time employees, you have options. Review this article to learn about contract employees, seasonal employees, and more: 6 Types of Employees and Quick Facts.
Additional resources
The SmartBiz Small Business Blog has a host of articles about finances, growth, and lending. Here are a few to help you shore up your business.
- Small Business Revenue. Determine Where You Stand – Learn how your small business is defines, the average revenue of US small businesses, and additional strategies to manage.
- What Are Business Revenue Trends and How Are They Calculated? Are you seeking a low-cost small business loan? Banks consider a number of ratios to evaluate a company’s financial health before they agree to grant a loan and one is the revenue trend of your business. Revenue trends are considered a more valuable measure of financial health than just flat revenue numbers per year. Our article has important information you need to know if you’re planning on applying for a loan.
