Influence of sales and revenue on earnings

How do sales and revenue affect a company’s specific earnings? We explain the terminology and how the various factors interact.

Sales in business: a definition

Sales are defined as the quantity of goods sold in a defined period of time. Sales are influenced by

  • the product features,
  • the price and the conditions,
  • the communication
  • and distribution.

These four aspects are the components of the marketing mix as defined by Philip Kotler:

Product policy not only decides on product development, including packaging and customer service, but also defines the product range (product management). The starting point is market observation.

Pricing policy determines the sales prices. The basis for this is the business model: should individual products or services be sold or should products be sold by subscription or at a flat rate. In multi-level sales channels it is important to define the prices for the intermediate trade levels as well, a task that is not at all undemanding. In addition, the sales conditions are also defined with the pricing policy. These can be quantity discounts or bonuses.

Communication policy defines all advertising, PR and sales promotion measures. Advertising is about delivering sales-relevant messages to the defined target customers via suitable communication channels – from classic advertising channels to the use of high-potential influencers. PR includes accompanying measures for brand development (e.g. events, publications, sponsoring). Sales promotion includes point-of-sale promotion, discount campaigns and the training of sales agents.

The distribution policy decides on the distribution concept. In particular, the distribution policy determines whether products are to be sold directly or through sales intermediaries. It also decides on web-based shops, the sales organisation and the sales process.

Beware of trying to directly influence the sales or turnover leverage. This will not work. Sales and turnover are target and inventory parameters that serve as key figures but cannot be directly influenced. A statement such as: “Increase turnover” will lead nowhere. These target parameters must be backed up by a well coordinated set of measures. Sales and turnover can be influenced by pricing and by promoting sales volume. The latter is also only a target parameter that must and can only be influenced by further bundles of measures.

What is turnover?

Turnover is the product of sales volume and sales prices for the products sold. Turnover can be maximised by optimising the marketing mix.

The more attractive the products, the more competitive the pricing, the more actively advertised and the more effectively sold, the higher the sales will be. Sales can be influenced with the price screw. With low prices, sales are promoted; with rising prices, sales are dampened. Sales multiplied by the selling prices gives the turnover.

How sales and turnover affect profits

Sales and turnover are an indication of how market-driven the service offered is. The greater the demand for the services, the better the offer is positioned in the market. A high demand is a confirmation that the marketing mix is coherent.

However, high sales and turnover do not necessarily mean that the company is doing well economically. In order to determine the revenue, the gross profit must first be recorded. This is the turnover minus all variable external costs. In the case of manufacturing companies, this includes in particular the cost of materials; in the case of trading companies, it is the procurement costs for the trading goods.

The company must finance all its activities from the resulting gross profit. This includes depreciation on investments, personnel expenses, all other operating expenses, interest payments and operating taxes.

For more in-depth analyses, it is interesting to look at the product groups or the submarkets. It is advisable to compare the gross profits with the variable expenses. The variable expenses include the costs for all activities that are incurred for the production and distribution of the respective products. These include direct personnel costs, costs of machine use, tool costs, energy costs and costs for warehousing. This shows which product groups or submarkets have high contribution margins and which do not. The contribution margins are the financial resources available to cover overhead expenses. Overhead expenses include all administrative activities, costs for buildings, vehicles, etc., financing the business as well as taxes and duties. If the contribution margins are sufficient to cover the total overhead expenses, it does not make a loss. It is profit-neutral. Each additional contribution margin adds income, i.e. profit, to the business.

Measures to increase earnings can be linked to the results of the contribution margin analysis. A shift towards business with a high contribution margin improves earnings.

To make the right decisions, be aware that variable expenses do not always develop proportionally to sales. Variable costs can be influenced primarily through product development, the choice of manufacturing processes and through work organisation. Dynamic effects must also be taken into account: economies of scale and bargaining power in purchasing can lead to variable costs having a smaller share in the sales volume (degressive variable costs). This makes the business more profitable. If sales shrink, the variable costs can account for a higher share of the sales volume (progressive variable costs). Then the business becomes less profitable.

For basic advice on Increasing sales and turnover, refer to chapter 1 on 'Marketing and sales'.


What are your challenges?

Restart Dialogue