You start a business, and people love what you’re selling. Money comes rolling in. Congratulations are in order. One important question, though: Is that money revenue vs. profit, and does the answer matter?

If you want to keep your winning streak going, it does. In fact, understanding the differences between revenue vs. profit is key to whether your business thrives or dives, so let’s cover the fundamentals.

What you’ll learn

• What is revenue?
• What is profit?
• The differences between revenue vs. profit
• Examples of revenue vs. profit
• Measures of success and sustainability

What is revenue?

Revenue is the income generated by selling your products or services before you start subtracting expenses. It’s sometimes called “top line” because you’ll find it at the top of your income statement.

What impacts revenue?

Revenue is directly impacted by sales and how well your sales team can sell in your marketplace. Let’s break it down:

Product-market fit

How well does your product or service address your target audience’s wants and needs? A strong product-market fit means high demand and strong revenue.

Example: Imagine you’re selling productivity software. A strong product-market fit means your software directly addresses the challenges your target audience faces — disorganized workflows, missed deadlines, or difficulty with team collaboration. By showcasing features that solve these pain points, your sales pitch becomes more compelling. That leads to higher conversion rates and, ultimately, more sales.

The superiority of value proposition

Why would someone buy your product or service? That’s your value proposition (or value prop). A compelling value prop makes it clear that what you’re selling is better than your competition’s offering. It also can drive a big boost in revenue.

Example: Think of your value proposition as your elevator pitch to a potential customer. Another company offers basic accounting software, but yours sells an integrated solution that automates tasks and generates reports with a single click. By emphasizing your value proposition, you can stand out from the competition and close more deals.

Relative strength against the competition

Your competitive landscape plays a vital role. If your product offers unique features or higher quality, you’re likely to attract more customers and bring in more revenue.

Example: Let’s say you’re selling customer relationship management (CRM) software. Brand X offers basic contact management features. However, your brand offers advanced features such as marketing-automation tools, lead scoring, and in-depth customer analytics. This clear differentiation allows your sales team to target customers who value these advanced features. That could command a higher price point per user, increasing your average deal size.

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Accessibility to the market

Revenue hinges on reaching your target audience. What’s the point in selling something no one can buy? Effective marketing strategies, strong distribution channels, and a user-friendly sales process all make your product or service readily available to your customer.

Example: You’re selling a new line of exercise bikes. Having a user-friendly online store with clear product information, multiple payment options, and fast delivery options makes it easier for customers to complete a purchase. Similarly, offering free trials, demos, and readily available sales representatives can streamline the sales funnel and convert more leads into paying customers.

Access to resources

Resources such as capital (assets or cash), skilled labor, and technology mean everything when developing and marketing your product or service. A lack of those can kill your ability to service your audience, which could also hurt revenue growth.

Example: You sell for a startup B2B software company that struggles to keep pace with the competition. Their limited capital prevents them from investing in research and development for cutting-edge features their clients need, hindering their ability to compete and attract new customers.

External disruptions

Events around the world play a role in your business’s success. While you can’t control everything that happens, you can prepare your organization to weather episodes such as recessions and rising inflation.

Example: Supply chain disruption can wreak havoc on car manufacturers and their dealers. They require a constant flow of parts and materials such as semiconductors, steel, and rubber. Shortages of any of these can halt production lines and delay deliveries, which means fewer cars on the lot for dealers to sell.

Now let’s look at the various types of revenue you will encounter and how to calculate them.

Types of revenue

In understanding revenue vs. profit, let’s say you run a boutique hotel. You look at your income statement and see the following phrases:

Gross revenue: Your total sales. This line item accounts for all the guests who booked a hotel room, ordered room service, or used chargeable amenities. It does not include discounts or refunds.

Net revenue: Sometimes called net sales, net revenue is when you take your gross revenue and subtract any discounts offered on rooms or refunds for room service.

Non-operating revenue: Income that comes from sources outside your daily operations. For a hotel, that could be commercial rental income (leasing another business space).

Average revenue per unit (ARPU): The metric used to understand the average revenue generated per unit sold. The meaning of “unit” will vary depending on the business. For your hotel, that is how much revenue you generate per room, on average.

Monthly recurring revenue (MRR): This metric focuses on the predictable, recurring revenue a business generates every month. An example would be if your hotel offers a monthly subscription to exclusive hotel amenities so guests can enjoy discounts on spa services.

Annual Recurring Revenue (ARR): Like MRR, ARR is revenue your business generates every year. This would be applicable if your hotel offers a membership subscription that collects an annual fee.

You’ll notice that expenses still have not been accounted for yet. All these revenue categories represent the income you’ve created via sales. Let’s go a step further and break down how to calculate each type of revenue.

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How to calculate revenue

Grab your income statement and let’s start at the top.

Gross revenue

Gross revenue = total sales x sales price per unit

Example: At your hotel, you booked a total of 150 nights in a month. The average daily room rate for the month was $120.

150 nights (total sales) x $120 (sales price per unit) = $18,000

Net revenue

Net revenue = gross revenue – directly related discounts and refunds

Example: Let’s say you found your total gross revenue was $100,000 for the month (after you added in room service and other sales). But you offered 50 guests half off their room rate ($120/2 = $60). Let’s find the total discount value first.

50 guests x $60 = $3,000

If this was the only discount offered for the month, then the net revenue would be:

$100,000 (gross revenue) – $3,000 (total discounts) = $97,000

Average revenue per unit or user

ARPU = total revenue / total number of customers or units

Example: We will need to use the answer we found for your net revenue ($97,000) and how many nights (units) are booked (150).

$97,000/150 = $646.67 per night

Monthly recurring revenue

MRR = average revenue per unit or customer x total customers or units

Example: Your hotel offers visitors a monthly subscription of $20/month for spa services. They have 200 people signed up for the month.

$20/month x 200 subscribers = $4,000

Annual recurring revenue

ARR = MRR x 12

Example: Take your MRR figure and multiply by 12 (months)

$4,000 (MRR) x 12 = $48,000

Understanding each type of revenue and keeping a consistent record will help you understand how healthy your business is and if you are utilizing your resources correctly.

While revenue is the result of how well you service your customers, profit is all about how efficiently you are doing it. Let’s take a closer look at the latter.

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What is profit?

Profit is the money a business has left over after all expenses are subtracted from revenue. Gross and net profits are located at the bottom of an income statement. So, when you hear someone say, “What’s your bottom line?” They are asking what profit your business made.

When we discussed net revenue earlier, we only subtracted the expenses directly tied to the revenue — discounts, refunds, etc. Gross and net profits take it one step further by deducting from the revenue all other cost of goods sold (COGS) and operating expenses.

Just like I did for revenue, I will explain the different types of profit and how to calculate them. But first, let’s explore what can impact your bottom line.

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What impacts profit?

Your profit stems from your revenue. All the factors that impact your revenue I shared above will also impact your profit. But few particulars directly impact profit.

Economies of scale

This principle states that as a business grows and production volume increases, the average cost per unit of production decreases. That means higher profit margins.

Example: A bicycle manufacturer negotiates better bulk discounts on raw materials (such as steel) as they produce more bikes. This decrease in per-unit cost allows them to maintain their selling price while increasing their profit on each bicycle sold.

Efficiency and effectiveness

Streamlined operations and well-trained employees contribute to both reducing costs and boosting productivity. This, too, means higher profits. You often see this when a company reduces operating expenses so it can increase profits without selling more products.

Example: A software company invests in training its customer service team to resolve customer issues more quickly and efficiently. This reduces the average time spent per call, allowing the team to handle a greater number of cases and potentially reducing the need for additional staff.

Business model superiority: smart market research

A well-defined business strategy and a strong business model that nails both revenue generation and cost management can mean maximum profit.

Example: A startup specializing in a specific marketing-automation niche operates with a small, highly skilled team and uses online marketing channels to attract clients. Their focus on automation and streamlined operations allows them to keep costs low, potentially leading to higher profit margins per client. Their superior business model focuses on efficiency. Their lean structure allows them to offer competitive pricing and potentially shorter implementation times. You, the salesperson, can take advantage of that when negotiating deals and highlighting the cost-effectiveness of your solution.

Now, let’s break down the types of profit and how to calculate them.

Types of profit

There are two types of profit: gross profit and net profit (sometimes called operating profit). Both are tied to the calculations of your revenue.

Gross profit: The money you have left over after you deduct your COGS — or how much money you spend making or producing your product or service.

Net profit (operating profit): What you get when you take your gross profit and subtract all fixed and variable expenses such as employee salaries, utilities, etc.

How do you calculate profit?

Let’s check back in with your income statement.

Gross profit formula

Gross profit = net revenue – COGS

Example: In our boutique hotel example, we found its net revenue to be $97,000. Now, you need to figure out the total COGS or the direct expenses incurred to provide a room to a guest for one night. This might include linens and amenities. We will say the COGS per night is $30.

$30/night x 150 nights = $4,500 (total COGS)

Now, apply to the gross profit formula.

$97,000 (net revenue) – $4,500 (total COGS) = $92,500

Net profit or operating profit formula

Net profit = gross profit – operating expenses (subtract interest and taxes, if necessary).

Example: We know your gross profit is $92,500. The total operating expenses for running a hotel can include salaries, property taxes, rent, marketing, vendor payments, utilities, etc.

Let’s say all operating expenses are $60,000. Net profit would be calculated as:

$92,500 (gross profit) – $60,000 (operating expenses) = $32,500

Net profit is a crucial metric for business health because it tells you how much money you keep after all operational costs are covered.

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The differences between revenue vs. profit

Revenue and profit have a close relationship, with key differences in how companies utilize the information they gain from them.

Top and bottom finances

An obvious difference is their location on your income statement — revenue at the top and profit at the bottom. The placement reflects the logical flow of business activities. You want to see how much money you made from your sales (revenue). Then, you subtract the expenses it takes to keep your business afloat. Finally, you arrive at your profit — the remaining income. This setup helps tell the financial story of your business in a given period. You can track where your money came from, where it went, and what you are left with.

Forecasting and investing

Revenue helps sales teams forecast the supply of goods they need to meet future demand. Think about selling a project management tool. Without a clear understanding of revenue trends, it’s difficult to predict how many new subscribers you’ll need to attract up in the coming months.

Underestimating demand could lead to a frustrating scenario where potential customers are eager to sign up, but you can’t onboard them due to limited server space or insufficient customer support staff.

Overestimating demand isn’t great, either. You might invest heavily in additional servers and hire a larger support team, only to find you have excess capacity that isn’t being utilized.

Sales professionals use a revenue intelligence platform to help track trends and compare data period over period, so they lower their risk of overspending or coming up short.

Forecasting helps sales leaders decide how and where to invest surplus funds. If they anticipate a profitable quarter, they might want to invest in new technologies, increase their workforce, or provide bonuses and promotions to their employees. If they predict low to no profit, then the business will be more financially conservative.

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Examples of revenue vs. profit

Let’s see how the dynamics of revenue vs. profit play out with a simplified income statement for your boutique hotel.

Income Statement
For the Month Ending April 30, 2024

Revenue

• Room Revenue: $100,000
• Room Service Revenue: $5,000

Gross revenue: $105,000

Refunds on room revenue

• $150
• $300
• $600
• $800
• $150

Total refunds on room revenue: $2,000

Net Revenue: $103,000

Cost of Goods Sold

• Housekeeping & Amenities: $15,000
• Linens & Laundry: $5,000
• Utilities (Room Related): $3,000

Total COGS: $23,000

Gross profit: $80,000

Operating Expenses

• Salaries and wages: $30,000
• Rent and mortgage: $10,000
• Marketing and advertising: $5,000
• Utilities (general): $4,000
• Property taxes and insurance: $3,000
• Other operating expenses: $3,000

Total Operating Expenses: $55,000

Net profit: $25,000

Revenue and profit work together

The relationship between revenue and profit is unique to each business. Revenue is the thrust to beat the drag when flying. Profit creates the lift to overcome gravity and keep you airborne. You need them both for a successful flight. Should we prioritize one or the other? To quote Peter Drucker, “The purpose of business is to create and keep a customer.” When in doubt, recall this quote. If you can keep and create customers to drive revenue while creating profit for future growth, you’re on the right path.

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