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Every business needs to track their financial situation closely. And while there are plenty of important metrics to keep track of, few are as essential as your revenue metrics.
Net revenue and gross revenue are the two most commonly tracked financial metrics for all brands, and they’re essential in subscription businesses.
So, what is net revenue? How does it compare to net income and gross revenue? How can you calculate your net revenue and leverage that information for your business?
We’ll answer all these questions and more!
What is Net Revenue?
Net revenue is the total amount a business earns from its operations after subtracting costs like refunds, returns, discounts, and deductions.
For subscription-based businesses, this would be the total profit from your monthly recurring revenue after removing the costs of refunded or discounted subscriptions.
Revenue can include all sources of income, including interest generated in a business savings account, affiliate/partnership sales, or ad-based revenue.
What Transactions Impact Net Revenue?
Net revenue isn’t just impacted by overhead costs and standard taxes; it can also be impacted by customer transactions.
All types of customer transactions impact net revenue, including the following:
Sales: For subscription businesses, this is often the cost of a customer’s monthly subscription, including add-ons.
Refunds: You may choose to refund clients who forgot to cancel their account, for example, or who had a negative experience with an add-on feature and want the payment returned.
Discounts: Customers may receive a special discount or offer to test new products as a loyalty reward or to compensate for a bad customer experience.
When calculating net revenue, you’re looking at money generated, not the value of items sold. If you make a sale that’s later refunded, that refund comes out of the net revenue. It’s important to note that while net revenue focuses on core operational income, other forms of revenue, like interest or affiliate sales, while impacting overall profitability, are typically not included in net revenue calculations.
Why Net Revenue Matters
Net revenue is an important metric because it provides invaluable insight into how much capital your business is making in sales after refunds and discounts.
Here’s an example:
Say that your monthly recurring revenue (MRR) is $20,000, with the average subscription costing $200 a month. If one of your clients asks for a refund, many financial revenue analytics tools will still show a $20,000 MRR, but you need to subtract $200 to get your net revenue.
It is important to understand how discounts and refunds can impact your overall revenue and profit margins so you can adjust accordingly.
What’s The Difference Between Net Revenue vs. Gross Revenue?
Net revenue and gross revenue look at overall profit, but in different ways.
Net revenue, as we’ve already discussed, looks at the revenue that you’ve earned after initial sales-focused costs like returns or deductions.
Gross revenue, on the other hand, looks at the total amount that you’ve earned in a set period without subtracting those costs.
When it comes to gross revenue vs. net revenue, it’s important to look at both. Gross will provide you with information about the total amount of profit that you brought in the door in total, while net revenue gives you an accurate look at what that profit looks like after additional transactional costs set in.
What’s The Difference Between Net Revenue vs. Net Income?
The terms “net revenue” and “net income” are sometimes used interchangeably. When this is the case, people may use “net revenue” to refer to profit minus all expenses, including overhead, licensing, and operational costs. But that’s actually what net income is.
Net income is your total revenue minus all expenses, including employee salary and benefits, manufacturing costs, rent, warehouse fees, licensing and permits, SaaS tech, training programs, insurance, and more.
Net revenue is technically just your total revenue minus those transactional expenses.
Again— both matter here because they show you two different things.
Your net revenue can ensure that you’re mostly profitable in transactions and that returns or deductions aren’t devouring profitability.
Your net income, on the other hand, can show you your business's true profitability. It can flag costs that need to be changed or signal that pricing needs to be altered.
How to Calculate Net Revenue
Good news: the net revenue calculation process is relatively easy, as long as you’ve got your revenue data easily accessible. (We’ll talk about that more in the next section!)
Calculating net revenue involves adding up your total profit over a set time period and then subtracting the total transactional costs, such as discounts and refunds.
In other words, here’s the net revenue formula:
Net Revenue = Total Revenue − Total Transactional Expenses
Net income, meanwhile, would use this formula:
Net Income = Total Profit − Total Expenses
And the gross revenue formula is simply adding all income and profit together.
Gross Revenue = Total Sales Revenue
Overview of concepts between Net Revenue, Net Income, and Gross Revenue
Final Thoughts: Using Baremetrics for Net Revenue Management
Tracking and optimizing net revenue is most effective when using the right tools.
For subscription-based businesses and startups, Baremetrics should be your tool of choice.
Our revenue analytics software is reliable and trustworthy, so you can know that each of the 28 metrics we track is always accurate.
Unlike other platforms, for example, we look at the revenue you’re generating. Delayed or paused subscriptions aren’t counted in revenue because they aren’t income that you’re earning that month; this is unlike many other platforms, including those marketed to SaaS brands, which count all subscriptions (even inactive ones) towards revenue forecasts and projections.
Our subscription analytics software not only gives you all the insights you need into monthly recurring revenue and annual recurring revenue, but we also have tools that go beyond just basic reporting.
Our Recover feature, for example, helps you prevent failed charges and engages customers before they let a subscription lapse. We also have forecasting tools to help you reasonably predict what’s coming soon.
We can help you not only track but better manage your net revenue. Ready to track and optimize your net revenue? Sign up for your free trial today.
