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Introduction to
Revenues & Demand
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
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
Factors affecting demand
•   Prices
•   Incomes
•   Tastes & fashions
•   Competitor actions
•   Social & demographic
•   Seasonal changes
•   Changing technology
•   Government decisions
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
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
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
The demand curve

                The relationship
               between quantity
              demanded and price
                 can be shown
                 graphically by
               drawing a demand
              curve, as illustrated
                   opposite
What is revenue?
• Various terms used!
  – Sales
  – Revenues
  – Income
  – Turnover
  – Takings
• Revenue arises through the
  trading activities of a
  business
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
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
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)
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!
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
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
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?)
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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Introduction to Revenues and 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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