Total Revenue Formula – Why Should Business Owners Use It?
Total revenue is the amount a company or business owner receives for the services or products they sell in a specific period of time. The total revenue formula helps business owners to decide whether they should raise their prices, or offer a discount on their goods.
So, here’s the formula as well as the reason why business owners should know how to calculate it.
Total Revenue Formula
Here’s the formula that will help you calculate your total revenue:
Quantity Sold x Price = Total Revenue
Let’s say you sell shoes and the cost of one pair is $200.
If you sell 100 pairs per month, your total revenue would be $20,000.
100 x $200 = $20,000
The same total revenue formula can help you to calculate how many more shoes you’d need to sell to make the same amount before your discount. This time, you’d need to divide your previous total revenue amount by your discounted price.
- Total Revenue = Quantity Sold x Price
- So, Quantity Sold = Total Revenue / Price
- If your discounted price is $180, then:
- Quantity Sold = $20,000 / $180 = 111.11 shoes
This means that you need to sell at least 112 pairs of shoes to get the same total revenue you got before your discount. If you believe that the discount will bring more sales, it’ll be a fantastic move for you.
However, it takes more than just a gut feeling to predict the outcome. You need to understand the market price for shoes like the ones you produce, and the size of your target market.
Total Revenue vs. Marginal Revenue
Marginal revenue is closely linked to total revenue since it presents the change in the total revenue with reference to a change in a different variable. It shows the change in revenue due to a change in the total amount of products sold.
Marginal revenue shows how much revenue increases as a result of selling an extra unit of a product or service. It’s calculated with the help of the total revenue formula or dividing the change in total revenue by the change in the quantity sold.
The Importance of Total Revenue
Knowing the total revenue is the basics business owners need to determine their pricing.
Imagine you’re an independent contractor who charges $100 per hour for your services. If you want to work 40 hours per week, out of which 10 would be for non-billable work, your total revenue per week would be $3,000 (30 hours x $100/hour).
If you’re not satisfied with this amount, you’ll probably have to consider raising your prices. But, if you think it’s enough, you should start considering possible expenses such as tax obligations or supplies and materials. In that case, knowing your total revenue will give you the start you need to explore your pricing options.
Using the total revenue formula helps business owners to see if they are gaining or losing money. In that way, they know if their business is growing, or they need to change something to get better results.