Use Cases
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Revenue vs. profit vs. income: The terms may seem synonymous and are sometimes even used interchangeably, but they tell different stories about a company. Revenue growth suggests an expanding business and in-demand product, but whether there is any financial gain for the business is determined by the income. As such, understanding the difference between revenue and income is essential for any enterprise’s longevity.
Let’s dive deeper into how these terms are reported on in accounting.
Revenue
Revenue refers to the total earnings a company generates through its core operations like sales of products or services, rents on a property, recurring payments, interest on borrowings, etc. Revenue calculations come before removing any expenses, such as discounts and returns.
For example, a SaaS company’s revenue is generated by selling software, while a financial lender earns revenue from interest on loans to borrowers. Other popular revenue models include:
- Subscriptions: One of the most common SaaS revenue models, businesses charge a customer a recurrent fee for the use of their product or service; could be monthly or yearly.
- Markups: Companies that buy and sell rely largely on markups whereby they add a percentage more to the cost of goods they buy to sell them at a profit.
- Licensing: A form of renting out goods and services, usually of intellectual nature. The seller retains full copyright on the product or service that the buyer uses.
- Advertising: Businesses turn their user traffic into revenue by offering the advertiser space to feature their product somewhere on their platforms.
- Pay-Per-User: The use of a product or service is metered, and customers are charged each time they use the service. This model is common in a software and specialized content context.
- Donation: Where companies rely on the donations of regular users for revenue. Think Kickstarter and Patreon-based ventures.
- Affiliate Programs: Businesses earn a commission on sales of products by promoting referral links through their website and other online platforms.
- Arbitrage: This model uses the price difference in two different markets of the same good or service to make a profit, whereby they buy in one market and simultaneously sell in another at a higher price.
- Commission: A company acts as a middle man for a product or service, earning revenue from each transaction it handles between two parties, or for any lead it provides to the other party.
- Data Sales: Businesses earn revenue from selling the data they collect on their consumers to other consumers or businesses.
- Web Direct Sales: Customers discover and pay for your goods or services through a digital medium.
The term revenue without any prefix refers to the gross revenue of a business. When a company is experiencing an increase in gross revenue or sales, it is said to have “top-line growth,” meaning it can generate sales or provide a product or service that has demand in the market.
Capital gains, interest earned on investments, sales of assets, or other miscellaneous earnings are not considered revenue.
Income
Also referred to as “net income” or “net profit,” income is the total amount of earnings a company makes minus expenses. It is calculated by subtracting the costs of doing business, such as depreciation, interest, taxes, and other expenses from revenue.
Income is referred to as the company’s bottom line because it provides a full picture of cash flow. It is likely that the term “bottom line” was coined as a result of net income sitting at the bottom of income statements.
Because it gives a picture of how efficient a company is regarding spending and managing operating costs, net income is considered the all-important measure of profitability. For example, though your SaaS business may experience revenue growth from comprehensive subscription management and new service offerings, how much you take home may be challenged by overheads such as high customer acquisition costs, employee remuneration, and the like.
Bottom line growth is always considered a good thing, and this is why an investor or bank will insist on looking at your company’s revenue vs. net income before giving you money.
What is the Difference Between Revenue and Income?
Let’s compare the two according to different scenarios.
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- Definitions
When comparing revenue vs income you should know that “revenue” refers to the total amount of money a company generates before removing any expenses. “Income”, on the other hand, is equal to revenues minus the costs of doing business, such as depreciation, interest, taxes, and other expenses.
- Definitions
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- Calculation
Revenue is calculated by multiplying the total number of goods or services sold by the price of those goods and services. Alternatively, it could be calculated by summing the total earnings from interest, rent, or services provided within a period. Income is calculated by subtracting the costs and expenses of the business from revenue. Expenses include overheads, commissions, taxes, etc. This is also the case for revenue vs. profit. - Financial Statements
On a company’s profit and loss income statements, revenue is placed at the top—usually the second or third item—while the net figure is placed on the second to last or last line. The “bottom line”. This is also why revenue is termed as a superset of the income and income a subset of revenue.
- Calculation
Revenue vs Income Examples
Still struggling to understand the definition of revenue? An excellent example of revenue vs. income is to look at the financial results of an example SaaS company, let’s call it Company X.
In 2018, Company X posted $1 million in revenue and $500,000 in net income for the same period. The company’s net income is always smaller than revenue since it results from the total sales and minus expenses for the period.
In 2019, Company X posted $1.2 million in revenue and a net income of $800,000.
Its chief financial officer (CFO) cited the introduction of pricing tiers as the reason for its top-line growth. On the expenses side, they were also able to cut down on taxes by automating VAT tax compliance for their ecommerce platform. The combination of new pricing tiers and tax optimization led to a 60% increase in income.
Now let’s look at a real-world example of one of the most profitable companies in the world: Apple Inc. In 2019, Apple reported revenue numbers of $260 billion and a net income of $55.3 billion.
Apple’s revenue in 2019 had decreased by about 2% from the previous year, while income went down by 7%. Revenue growth or decrease in a company such as Apple could be caused by anything from the launch—or lack thereof— of a new product or service, to a new advertising campaign that drives up sales. Similarly, an increase in revenue could be as a result of reduced expenses such as finding a cheaper supplier.
The above examples show how revenue versus income differs when referring to a company’s financials.
The Future of Revenue: Subscription Revenue
Monthly recurring revenue is one of the most important forms of revenue you can establish for your business. Taking advantage of a subscription revenue model not only ensures consistent monthly income, it can also lead to a bigger customer base.
Consumers are seeking the ease and reliability of a subscription model where they put their purchases on autopilot so they can have continuous access to SaaS products. 15 percent of online shoppers pay for at least one subscription and nearly 90% of businesses are looking for ways to adapt their online payment platforms so they can handle recurring subscription payments.
A business can collect subscription revenue through month-to-month plans, or subscriptions based on contracts where a customer pays a monthly or annual fee but is locked into a term contract.
With all the software and digital products we consume online continuously, it’s easy to see why subscription services are becoming popular. For businesses, this revenue model presents unique advantages such as:
- Consistent Revenue
As mentioned above, subscription payments create a recurring payment cycle. This helps your business keep regular, more dependable revenue numbers and improves forecasting. Reasons such as these make a company more attractive to investors. - It’s Easier to Scale
With the right subscription tools, a company can go from 100 to 1000 new customers without breaking a sweat. A subscription model can streamline the entire post-checkout fulfillment process for every online purchase through your website. For example, FastSpring’s subscription management takes care of invoicing, payment processing, fraud protection, and tax management automatically. - Increased Customer Retention
You can foster better customer relationships with a subscription-based model through the usage data you collect. The more you know about your customer, the more in tune with their needs you’ll be.
If you’re looking to unlock revenue growth for your online company, you’ll benefit from our easy-to-use full-service ecommerce platform that supports any subscription-based billing model.
Boost Your Business With FastSpring
Understanding the relationship between your company’s revenue and income gives a true picture of your business’s standing and allows you to analyze where you can improve.
Are you looking for tools to optimize your income? Find out how FastSpring can help your SaaS business sell more, stay lean, and compete big. Create a free account today!
