Introduction to Revenues and Demand


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

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Introduction to Revenues and Demand

  1. 1. Introduction toRevenues & Demand
  2. 2. Two key concepts Demand RevenuesThe amount of a The amount of a product that product that customers are customers actuallyprepared to buy buy from a firm
  3. 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. 4. Factors affecting demand• Prices• Incomes• Tastes & fashions• Competitor actions• Social & demographic• Seasonal changes• Changing technology• Government decisions
  5. 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. 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. 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. 8. The demand curve The relationship between quantity demanded and price can be shown graphically by drawing a demand curve, as illustrated opposite
  9. 9. What is revenue?• Various terms used! – Sales – Revenues – Income – Turnover – Takings• Revenue arises through the trading activities of a business
  10. 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. 11. Calculating revenue - exampleProduct Qty Price Sales £ / unit £Blue 5,000 £10 £50,000Red 2,500 £12 £30,000Pink 8,000 £11 £88,000Purple 4,000 £10 £40,000Total 19,500 £208,000
  12. 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. 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. 14. Elasticity of demand Changing the selling price of a product can affect the value ofCookie Daily Revenue Forecast total revenue. The nature of theAverage 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. 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. 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. 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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