What Makes a Product Financially Viable
Revenue generated by sales of the product
Contents
Revenue is the income an enterprise receives from selling its products or services — the money coming in from customers. Sales revenue is the total revenue generated by selling a product or service, before any costs are taken away.
For example, you charge £9 a walk for a weekend dog-walking service. Completing 25 walks in a month gives sales revenue of £225 (25 walks at £9 each), because that money comes straight from selling the service.
Revenue is not profit
Profit is what is left after the costs of running the enterprise have been taken away, so revenue is income before any costs are deducted. Your revenue is £225; if leads, treats and insurance cost £70 that month, the profit is £225 − £70 = £155. Revenue stays at £225 whatever those costs are, and an enterprise with high revenue can still make a loss if its costs are higher than its revenue.
| Revenue | Profit | |
|---|---|---|
| What it measures | Income from sales | Money left after costs |
| Are costs subtracted? | No | Yes |
| Can it be negative? | No, it is income from sales | Yes, a negative profit is a loss |
Costs are not subtracted from revenue
When you work out revenue, use only the money from sales. If you are given cost figures, such as how much each item cost the enterprise to buy, leave them out: they are not part of revenue and belong in a profit calculation. Taking the £70 of costs away from the £225 gives profit, not revenue.
A unit is a single item or service that is sold. The selling price per unit is the amount charged to the customer for one unit, such as one drink, one ticket or one hour of a service. It is the price you charge, not what the unit costs you to provide.
Total revenue from sales is the money received from selling units. You calculate it by multiplying the selling price per unit by the number of units sold. The formula is:
total revenue = selling price per unit × quantity sold
Multiplying works because every unit sold at the same price brings in that amount. If a community cinema sells 140 tickets at £6 each, the total revenue is 140 × £6 = £840. The 140 is the quantity sold and £6 is the selling price per unit.
Check that both figures describe the same unit. If the selling price is for one drink, multiply it by the number of drinks sold, not by the number of customers.
When an enterprise sells more than one product or service, work out the revenue for each product separately, then add the amounts together to find total revenue. Each product has its own selling price, so the prices only match up with their own quantities if you calculate product by product.
For example, a school enterprise sells printed tote bags at £8 each and branded water bottles at £11 each. In one month it sells 75 tote bags and 60 water bottles.
| Product | Units sold | Selling price per unit | Revenue |
|---|---|---|---|
| Tote bags | 75 | £8 | 75 × £8 = £600 |
| Water bottles | 60 | £11 | 60 × £11 = £660 |
| Total | — | — | £600 + £660 = £1,260 |
The total revenue is £1,260. Adding the units together first (135 units) would be no use, because tote bags and water bottles are sold at different prices, so one combined price would describe neither product.
Setting the working out product by product keeps each price with the right quantity, makes the final total easy to check, and shows where every part of the income came from. Calculating revenue for just one of the products and stopping there understates total revenue, because it leaves out income the enterprise actually received from its other products.
Revenue can be measured over any time period you need, such as a day, week, month or year. If sales bring in the same amount each period, you can scale the revenue up or down to match the period in a question.
Shorter period to longer period
To convert revenue from a shorter period to a longer period, multiply by the number of shorter periods in the longer period. This works because the longer period contains several of the shorter periods, so the revenue is repeated.
For example, a dog-walking business earns £240 in a week. If it earns the same every week, its yearly revenue is £240 × 52 = £12,480, because there are 52 weeks in a year. To go from a day to a week, multiply by 7; from a month to a year, multiply by 12.
Longer period to shorter period
To convert revenue from a longer period to a shorter period, divide by the number of shorter periods in the longer period. This gives the average revenue for each shorter period.
For example, an online phone-case shop has annual revenue of £18,000. Its average monthly revenue is £18,000 ÷ 12 = £1,500. Dividing is the opposite of multiplying, so do not multiply when you are going from a year to a month.
Keep the time units consistent
Use the same time unit throughout a calculation, and finish by converting to the period the question asks for. If a question gives daily revenue but asks for a yearly figure, work out the revenue for one week using the number of trading days, then multiply by 52.
For example, a market stall takes £95 per day and trades 6 days a week. Weekly revenue is £95 × 6 = £570. Annual revenue is £570 × 52 = £29,640. Mixing days and weeks without converting would give a figure in the wrong time period.
Some questions give sales as a steady rate for one time period, such as units per day or per week, but ask for revenue over a different period. Work out the revenue for the period the rate is given for first, then scale it to the period you need by multiplying or dividing.
How to do it
- Multiply the selling price by the number of units sold in the period the rate is given for.
- Multiply or divide that revenue by the number of periods you are converting between. Multiply when scaling up to a longer period and divide when scaling down to a shorter period.
A market stall sells 15 jars of honey a day at £4.50 each. Daily revenue = 15 × £4.50 = £67.50. The stall trades 5 days a week, so weekly revenue = £67.50 × 5 = £337.50. Over a 4-week month, revenue = £337.50 × 4 = £1,350.
Going the other way, if the stall takes £1,350 over 20 trading days (4 weeks × 5 days), daily revenue = £1,350 ÷ 20 = £67.50.
Why work it out in stages
Finding the revenue for the period the rate is given for first keeps every figure tied to a time period you can check, so the amount you then multiply or divide is clearly a "per day" or "per week" amount. It also makes your working easy to follow, so a marker can see each stage and award method marks.
You can instead multiply the price by the total number of units for the whole period, but only once that total has actually been calculated, or when the question hands it to you. Assuming a total quantity that nobody has worked out is where answers go wrong, such as treating a daily sales figure as though it were already the figure for the whole month.
The revenue formula is total revenue = selling price per unit × quantity sold. If you know two of these values, you can rearrange the formula to find the third. Rearranging uses inverse operations: because selling price and quantity are multiplied, you divide to undo that multiplication.
Finding the selling price per unit
To find the price charged for one unit, divide total revenue by the quantity sold:
Selling price per unit = total revenue ÷ quantity sold
For example, a school enterprise sells 70 candles and receives total revenue of £560. Selling price per unit = £560 ÷ 70 = £8.
Finding the quantity sold
To find how many units were sold, divide total revenue by the selling price per unit:
Quantity sold = total revenue ÷ selling price per unit
Using the same candle stall, if total revenue is £560 and each candle sells for £8, quantity sold = £560 ÷ £8 = 70.
When rearranging, divide rather than multiply. Multiplying total revenue by quantity sold or by selling price per unit would not give the missing value.