Revenue and Demand

A business generates revenue by satisfying demand from customers. In other words, revenues flow from customer demand – but only if a business has a product that meets the customer needs and expectations.

What are revenue and demand

The terms revenue and demand are related, but different:

Revenue

Revenue is the amount (value) of a product that customers actually buy from a business

Demand

Demand is the amount of a product that customers are prepared to buy.

Demand can be measured in terms of volume (quantity bought) and/or value (£ value of sales)

Factors affecting the level of demand

Various factors will affect the level of demand:

• Prices & Incomes (you look at this in more detail when considering elasticity of demand)
• Tastes & fashions
• Competitor actions
• Social & demographic change
• Seasonal changes
• Changing technology
• Government decisions

 The relationship between quantity demanded and price can be shown graphically by drawing a demand curve, as illustrated below:

Revenue

There are various different names for the same thing – the value of what a business sells!

• Sales
• Revenues
• Income
• Turnover
• Takings

They all mean the same thing - revenue arises through the trading activities of a business.

The value of revenue achieved in a given period is a function of the quantity of product sold multiplied by the price that customers paid. So revenues can be calculated using the following important formula:

Total revenue = volume sold x average selling price

An example of this calculation is shown in the table below:

The two ways to increase revenue

There are two main ways of increasing revenue:

Increase the quantity (amount) sold

• Perhaps by cutting the price or offering volume-related incentives (e.g. 2 for price of 1)
• Key issue - is demand sensitive to price? Will volumes demanded rise if the price is reduced and, if so, by enough to increase revenue? This is determined by the price elasticity of demand.

Achieve a higher selling price

• Best to add value rather than simply increase price
• Does market research suggest that prices are high enough or too low?