Revenue is the driving force behind your entire business success.
Three key types of revenue — total, marginal, and projected — can help you understand your current revenue situation and predict what it will look like in the future. Read on to learn how to calculate each type of revenue (with examples) and the importance of each.
Total, Marginal, and Projected Revenue: What’s the difference?
Analyzing revenue is no longer as straightforward as multiplying product sales and prices. While this is certainly part of the equation, it doesn’t give you a full picture of your current financial situation or future revenue potential.
To develop an informed and accurate revenue strategy, companies must understand the types of revenue they generate and how to calculate each. Total revenue, marginal revenue, and projected revenue are three of the most important calculations companies perform. Together, they provide a clear picture of the current and future state of your business.
They also inform business decisions about everything from production planning, resource allocation, and marketing and sales strategies (to name a few examples).
Before we dive into how to calculate each of these revenue categories, let’s define them clearly.
- Total Revenue - all revenue earned from product and service sales (and other sources, when applicable)
- Marginal Revenue - revenue earned through sales of additional units
- Projected Revenue - predicted revenue earnings for a specific time period in the future
How to Calculate Revenue (with Examples)
Total revenue encompasses all of the money your business earns during a specific time period. Generally, revenue is generated from sales of your product and service. As such, generating your total revenue simply requires a straightforward calculation of your total units sold multiplied by the cost of each unit.
Total Revenue = # of Units Sold X Price Per Unit
To use a simple example, suppose you’re running a new business selling shoes. You sell three types of shoes: sneakers, sandals, and loafers. You sell the sneakers for $50, the sandals for $30, and the loafers for $45.
During the previous month, you sold 110 pairs of sneakers, 75 pairs of sandals, and 90 pairs of loafers. First, you need to calculate the total revenue you earned from each product:
110 pairs of sneakers X $50 each = $5500
75 pairs of sandals X $30 each = $2250
25 pairs of loafers X $45 each = $4050
Then, you need to add the revenue from each product together:
$5500 + $2250 + $4050 = $11,800
The total revenue earned for that month was $11,800.
Marginal revenue is the amount of money you earn during a specific time period from selling additional units of a product or service. In other words, marginal revenue is the dollar amount added to your total revenue as a result of increasing either output or product sales.
It’s calculated by dividing your change in revenue by your change in quantity.
Marginal Revenue = Change in Revenue / Change in Quantity
Say, for example, that you run a business selling bottled beverages at local sporting events. You typically sell 500 units per weekend and earn $2000 in total revenue.
On the most popular weekend of the year, you decide to bring 100 extra units in case the crowds are larger. That weekend, you sell those 100 units in addition to your usual sales. Your total revenue is $2400.
Your marginal revenue would be calculated as follows:
400 (change in revenue) / Change in Quantity (100) = $4/unit
In real-world scenarios, marginal revenue has to be balanced with cost. Ordering additional units or providing additional output comes with associated expenses, and if your costs end up exceeding the marginal revenue earned, it can hurt your revenue rather than grow it.
Projected revenue is the most complicated of the three types because it requires forecasting the future. In simplest terms, revenue projections predict revenue earnings during a specific time period in the future. They’re primarily based on historical sales performance data but they also account for larger impact factors such as market trends, supply chains, and more.
There is no single projected revenue calculation that can be applied to all scenarios. There are various sales forecasting methods you can apply to fit your revenue projection needs and goals. Still, we can look at an example to illustrate how it’s done:
Many companies leverage lead data to predict what their sales revenue will look like in the future. It starts with looking at your pipeline and assigning value based on each lead’s source.
So, for example, if leads sourced from an online webinar series you run typically spend $2500 and convert at a rate of 10%, you can calculate lead value like this:
$2500 x 10% = $250 per lead
If you have 30 leads from this source in your pipeline, you can expect 3 to convert. Multiply that by $250 per lead, and you reach $750 in projected revenue from that lead source. You can repeat the process for each lead source, then add the totals for an overall projection of revenue from leads currently in your pipeline. This is called lead-driven sales forecasting.
Putting it Into Practice
Of course, real-life revenue calculations aren’t as simple or straightforward as the examples we’ve used in this article. Companies have varied and complex product and service offerings, multiple revenue streams, and unique revenue goals.
In addition, markets ebb and flow, and factors outside of your control will inevitably impact your revenue-earning potential.
The best way to manage your revenue in the real world is with an intelligent, AI-powered tool that can automate data analysis, integrate across multiple platforms, and use machine learning to predict the future in ways our human brains cannot.
Xactly’s Agile Revenue Performance Management software helps you drive sustained revenue growth while maintaining operational agility and a smart, data-driven strategy. Xactly can be integrated with your existing tech stack for seamless implementation, better collaboration, and higher visibility into your company’s sales performance.
Schedule your demo today!