Revenue, Profit, Loss and Market Share

‘Revenue’, ‘profit’ and ‘market share’ are the three basic and very important concepts that every business leader needs to understand.
Revenue is the total money that you will get if you sell something. For example, if Tom sold a motorbike to Jerry for 100 dollars, Tom earned a revenue of 100 dollars. But Tom had bought that motorcycle from Mike last week, for 80 dollars.
So if Tom bought the motorbike for 80 dollars, and sold it to Jerry for 100 dollars, Tom earns a total of 20 dollars (100-80=20). This is Tom’s profit!
The way to calculate profit is:

Revenue – Cost = Profit

Profit is the extra money we earn when we sell something.
But what if Tom had bought the motorbike from Mike, for 100 dollars?
Well, according to the calculation:

Revenue – Cost = Profit

100 – 100 = 0

His profit would be zero. But would his revenue also be zero? No! Tom would have still technically earned a revenue of 100 dollars, but would have made no profit. That is why we need to know exactly how much costs are going into the goods that we are selling, so that we may understand exactly how much profit are we earning.
Now what if Tom had bought the bike for 120 dollars, and had to sell it to Jerry for 100 dollars, because Tom needed the money in emergency?
Here, according to the calculation:

Revenue – Cost = Profit

100 – 120 = -20

Tom makes a negative profit of 20 dollars. This is called a ‘loss’. This is something that business leaders avoid. But in some cases, this something that they tolerate, to protect their ‘market share’. Lets understand what market share is.
Let’s go back to our friend Tom.
Tom lives in a village and has 3 cows. He sells the milk of these cows to the people of the village, and Tom is the only person in the village who has cows and sells milk. So this means that Tom has the entire market share of the village, when it comes to selling milk. This is also called a monopoly. When there is only one seller, and many buyers.
In business terms, a market is a group of people willing and able to buy what we are selling to them. So this means every house in the village is part of Tom’s market.
But now Jerry also moves to the village and Jerry also has three cows. Jerry can sell as much milk as Tom can sell, so half the houses of the village start buying milk from Jerry because their houses are closer to Jerry, as compared to Tom. This means that the market share is evenly divided between Tom and Jerry.
Tom will not like this change because this means his revenues, and profits, are also lesser now. Let’s see how:
There are 50 houses in the village, and each house used to buy milk worth of 20 dollars from Tom every month. So this meant Tom’s total revenue, when he was selling to the entire village was 1000 dollars, every month (20 x 50 = 1000). But Tom also used to spend 200 dollars every month on feeding his cows. So this means that Tom’s profit was 800 dollars (1000 – 200 = 800).
But now if Jerry has half the market share, that means that he sells milk to 25 out of the 50 houses in the village. The remaining 25 houses buy milk from Tom and this means that now Tom’s revenue is 500 dollars (20 x 25 = 500), which also means that Tom’s profit now is 300 dollars! (500 – 200 = 300). This is because Tom still has to feed his cows and the cost (200 dollars) remains the same.
Hence business leaders do not like losing market share to competition. We can now study methods to win over and defend market share.
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 MUJTABA GHAUS

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1 comment

  1. sekou teiya 4 years ago December 5, 2016

    thanks a lot. well appreciated!

    REPLY

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