A couple of weeks ago, we wrote a primer into increasing your bottom line. As a reminder, there are two basic items of focus:
(1) Increase your revenue,
(2) Decrease your costs.
As the title above implies (not so subtly), this post is part 1 in answering the question: How do you increase revenue?
First, it is important to understand the question. The question focuses on revenue and revenue only. That is, the total amount (the “gross”) of money flowing into the business. This is not your “profit margin,” or your profit, or your bottom line. In fact, many businesses suffer the problem of increasing revenue, but decreasing their bottom line. This can even lead to a loss!
You might be skeptical about this last point. If a business is bringing in more money, how can it be losing money? You will just have to trust us. It happens more often than you think. This is because there are hidden costs to increasing sales – you might spend more on advertising, shipping, employees, etc. Each of these expenses might decrease your per item profit margin until some, or all, of your items are actually selling at a negative profit margin and you don’t even realize it! But that will have to wait for a different post.
So, how do you increase revenues? Like our last post, it may seem obvious, but it’s more complicated than it sounds. Here are your two options, stated a little inaccurately (you will understand why a little later):
1) Increase the number of sales (i.e. if you sell 100 widgets a month, sell 200 a month), or
2) Increase the price per sale (i.e. if you sell your widgets at $1 per widget, sell them instead at $2 per widget).
Here is a basic idea of how these two interplay with each other. But since this is just an overview, we are not going to touch upon the intricacies such as marketing (which targets (1)) and how that might lead you to change your price (either up or down).
In the second example above, note that this would double your revenues, all things being equal. This is an important caveat – if we double the price, we would expect the number of sales to fall. That is, it would directly affect number 1 (how much depends on the elasticity of demand. Different items have different rates of change). If sales fall, then revenues decrease. At some point, the sales will fall so much that your revenues actually decrease. So, it is absolutely critical to know whether your price increase will lead to lower revenue.
This works in the inverse as well – decreasing price per sale can increase revenue by increasing sales. The increase in sales may (or may not) offset the decrease in price.
In any given month, you sell 100 widgets at $2, for revenues of $200/month. Let’s say you raise your price to $3. Now you find that you only sell 20 widgets/month, for revenues of $60/month, a big decrease.
So, you decide to lower your price to $1.50 and find that you now sell 200 widgets, for revenues of $300/month, a big increase.
It can work the other way as well: maybe when you lower your price to $1.50, you only increase to 125/month, for revenues of $187.50 per month, a DECREASE in revenues from your original price. Now, lets say you increase your price to $3 and find that sales only drop to 75/month, for revenues of $225/month.
So you can see that an increase in revenues don’t always come from an “increase” of sales or price, rather it is a “change” in sales, price, or (usually) both.