Total Revenue Test

What Is a Total Revenue Test?

A total revenue test approximates the price elasticity of demand by measuring the change altogether revenue from a change in the price of a product or service. Price elasticity alludes to the degree to which the price of a product or service influences consumer demand for it; when the price influences demand, the price is supposed to be versatile, however when it doesn't or doesn't less significantly, it is supposed to be inelastic. The total revenue test expects any remaining factors that might influence revenue will stay consistent during the testing period.

How a Total Revenue Test Works

The total revenue test can help a company in its pricing strategy. By deciding the degree to which a product is versatile or inelastic, the firm would have better understanding into how to boost total revenue, particularly on the off chance that it sells a scope of products. Assuming the test reasons that demand for a product is exceptionally flexible, the company will be extremely wary about price changes, as small changes could create large declines in demand and in this manner total revenue.

On the other hand, assuming demand is moderately inelastic, the firm will accept that increases in price will just yield small changes in the quantity demanded. Subsequently, an increase in price will be less inclined to spike a large diminishing in demand on the off chance that demand is extremely inelastic. As a matter of fact, an increase in price would be bound to lead to an increase in total revenue, on the grounds that an inelastic demand shows that price isn't one of the main factors impacting consumer demand for the product.

Illustration of a Total Revenue Test

An athletic clothing company makes three types of yoga pants called Downward Dog, Warrior, and Cobra that cost $50, $60, and $70, separately. The company sells 1,000 pairs of Downward Dog every month, 800 pairs of Warrior, and 500 pairs of Cobra at those prices. The yoga pants produce a month to month revenue of $133,000. The company conducts a total revenue test. It raises the price of Downward Dog to $55, raises the price of Warrior to $63, and brings the price of Cobra down to $67. Sales of Downward Dog drop to 700 pairs, while Warrior sales decline barely to 770, and Cobra sales increase to 600. Descending Dog revenue declines to $38,500 from $50,000 before the price change.

Demand is viewed as versatile for Downward Dog in light of the fact that the increase in price fundamentally impacted demand for the product and prompted a drop in revenue. On the other hand, the company acquired $510 in Warrior revenue ($48,510, the new price x quantity, versus $48,000 before the price change), proposing demand inelasticity from the $3 increase in price. The still up in the air from the total revenue test that consumers answered well to the discounting of Cobra pants. Cobra delivered $40,200 in month to month revenue, versus $35,000 already. Notwithstanding, combined revenue was $127,210, contrasted with $133,000 prior to the price changes. The company can conduct more cycles of the total revenue test to plan a pricing strategy to outperform $133,000.