The basics of business revenues and demand are explained in this revision presentation.

1. Introduction to
Revenues & Demand

2. Two key concepts
Demand Revenues
The amount of a The amount of a
product that product that
customers are customers actually
prepared to buy buy from a firm

3. What is demand?
• The amount of a product or service that
customers are able and prepared to
buy
• Can be measured in terms of volume
(quantity bought) and/or value (£ value
of sales)
• Demand will vary depending on several
factors

4. Factors affecting demand
• Prices
• Incomes
• Tastes & fashions
• Competitor actions
• Social & demographic
• Seasonal changes
• Changing technology
• Government decisions

5. Prices
• Usually the most important factor
• As the price increases, demand will usually fall.
The extent to which this happens is known as
the price elasticity of demand
• Price is often seen as a signal of value for
money or quality by customers
– A higher price might put some customers off who
don’t perceive it as good value for money compared
with cheaper alternatives
– Conversely, a product priced too cheaply might deter
customers who associate low prices with poor quality!
• Setting prices is a tough task for any start-up.
There is no magic formula, although market
research can quickly tell the business whether
its prices are out of line with the competition

6. Tastes & fashions
• Demand in consumer markets is often
influenced by changing tastes &
fashions
• A start-up trying to enter a fashion-
driven market needs to be careful.
These markets quickly attract new
entrants which reduces the available
sales and profits
• Example - coffee bar market in the UK
– Ten years ago there were few coffee
shops and a start-up would have a good
chance
– However, the market is now saturated
with competitors, making it very
difficult for a start-up to survive

7. Incomes
• Demand for most products
and services is closely related
to the disposable incomes of
customers
• When the economy is growing
(GDP rising), consumers have
higher disposable incomes
• However, in an economic
downturn, lower incomes
translate into less demand or
consumers switch their
spending onto other (often
cheaper) products

8. The demand curve
The relationship
between quantity
demanded and price
can be shown
graphically by
drawing a demand
curve, as illustrated
opposite

9. What is revenue?
• Various terms used!
– Sales
– Revenues
– Income
– Turnover
– Takings
• Revenue arises through the
trading activities of a
business

10. Calculating revenue
• 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
A formula to remember:
Total revenue = volume sold x
average selling price

11. Calculating revenue - example
Product Qty Price Sales
£ / unit £
Blue 5,000 £10 £50,000
Red 2,500 £12 £30,000
Pink 8,000 £11 £88,000
Purple 4,000 £10 £40,000
Total 19,500 £208,000

12. Graphing revenue
100
Using the revenue formula, you can chart the value
90 of total revenue. Revenues rise as higher quantities
are sold. In the chart below, we assume that each
80
unit of product is sold for the same price (£6). E.g.
Revenue (£’000)
70 10,000 units sold at £6 per unit = total sales of
£60,000
Total sales
60
50
40
30
20
10
0
1 2 3 4 5 6 7 8 9 10
Units of Output (‘000)

13. How to increase revenues
• Two main options
• Increase quantity (amount) sold
– Perhaps by cutting the price or offering volume-
related incentives (e.g. 2 for price of 1)
– Key issues - is demand sensitive to price?
• Achieving 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?
• Even better – try to do both!

14. Elasticity of demand
Changing the selling price of a
product can affect the value of
Cookie Daily Revenue Forecast total revenue. The nature of the
Average price per Quantity sold Total revenue effect depends on what is known
cookie per day per day as “elasticity of demand” – the
sensitivity of demand to a
£1.50 500 £750 change in price.
£1.75 450 £788
£2.00 425 £850 In the example left, you can see
the quantities of cookies sold at
£2.25 400 £900 a range of selling prices. If the
£2.50 325 £813 assumptions are right, the best
£2.75 200 £550 price to use to maximise total
revenues = £2.25 per cookie,
£3.00 75 £206
generating £900 revenue per day

15. What affects the price that can be charged?
• Prices charged by competitors
• How loyal customers are to their
existing suppliers
• Product quality
• Product availability
• Economic conditions – e.g. consumer
confidence
• Alternative purchases by the customer

16. Why startups find it hard to estimate
revenue (1)
• The size of the available market – easy to think the
market is bigger than it is!
• The price that customers will be prepared to pay - a
new product into a market often has to be offered at a
discount (lower price) in order to encourage customers
to buy for the first time
• The timing and source of sales - where will customers
buy and which methods will they use (e.g. from a
physical store, marketing leaflet or online store?)

17. Why startups find it hard to estimate
revenue (2)
• Ineffective marketing – marketing activities often do
not generate the excitement and customer buzz that
is intended!
• Competitor response – how will they respond to a
new challenger? A start-up business cannot expect to
enter a market without a challenge from the existing
operators

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