Gross Revenue Is A Vanity Metric
Gross Revenue charts on fundraise decks.
Gross Revenue used to calculate customer lifetime value.
Gross Revenue used to calculate sales team commissions!
Gross Revenue is one of those numbers that can make me a little crazy. Because in many types of businesses, it's an incredibly misleading number. It can tell a story of happiness and growth, while lurking just below sits Net Revenue, with a different story to tell.
Let's get definitions out of the way.
Quite simply, Gross Revenue represents all of your sales before any discounts, deductions or expenses. It's the price of what you sell multiplied by the number of times you sell it.
Notice, that I didn't say that it's the cash you take in on each sale. Which seems like an important distinction, right?
So let's define Net Revenue.
Net Revenue is Gross Sales minus refunds, returns, and allowances.
The concept of refunds and returns is pretty straightforward. The customer didn't like what you delivered, so they sent it back and asked for a refund. Or they subscribed to your paid email newsletter, hated the first one they read, and quickly asked for a refund. (Editors note: you can't asked for a refund for a free email newsletter...I don't reimburse for the value of the time it takes for you to read this!)
The category of sales allowances can include rebates or credits to your customers to address any problems they had with your product or service. Instead of sending them a cash refund or taking the product back, you give them a credit or rebate to use in the future. As the customer uses these rebates or credits, the deduction is taken against Gross Revenue.
The rate of refunds, returns and allowances are incredibly important metrics to track. They can have a material impact on the difference between Gross and Net Revenue. In some categories of retail, it's not unusual to see refunds, returns and allowances total more than 40% every month.
From a business management perspective, if you have unusually high refund and return rates, this has to be a signal that you have an issue with your product or service that you must address if you're going to build a scalable, profitable business.
From a pure numbers perspective, a 35% return & refund rate, plus another 10% for allowances due to dissatisfied customers add up to a 45% deduction from Gross Revenue to Net Revenue.
If you're giving back 45% of every sale you make, you can see how that Gross Revenue number is incredibly misleading.
If you use Gross Revenue internally in your company presentations, in your weekly reporting and in calculating bonuses and commissions, you are misleading your team, overpaying for sales that aren't real, and hiding from important issues that can sink your company.
If you show me a Gross Revenue growth chart or Customer Lifetime Value calculations that are built on Gross Revenue, and meanwhile your net revenue is 45% lower, I'm not going to trust any other number that you show me.
Don't hide behind Gross Revenue. There are powerful levers in the gap between Gross and Net Revenue. It tells the story of customer satisfaction and the quality of the service or product you sell. Face Net Revenue head on, and focus on closing that gap every day.
One last thing. I often see Net Revenue defined as Gross Revenue minus Costs of Sale. I don't think this is right. Gross Revenue minus Costs of Sale is Gross Profit. I'll tackle that in another post, as Gross Profit, and understanding your Gross Profit Margin, is the most important part of your P&L. But to be clear, I believe there is a very important difference between Net Revenue and Gross Profit, and you shouldn't confuse the concepts.
