Business owners have one thing on their mind at all times: growth. And that’s also a true statement in SaaS as well, especially in the current landscape. Measuring growth can be done using multiple metrics, but two, in particular, stand out.
Often mixed up, revenue and income, while similar, are very much different. Understanding what sets them apart is the key to effectively measuring the health and success of your SaaS business. In this article, we’ll be taking a serious look at this topic by examining the following:
Revenue represents the total amount of income gained through a company’s core operations. This means anything from the sale of products, services, recurring payments, and more. Also referred to as gross sales or top line, calculating revenue comes before deducting any operating expenses or costs. This is also why the formula used to determine revenue is so straightforward:
Keep in mind the use of revenue with no prefix actually refers to the gross revenue obtained by a company, and any registered increase is an indication of market demand.
Simply put, income derives from revenue. Referred to as net profit or net income, this metric calculates the bottom line of a company. Basically, this metric looks at the earnings gained by a company minus the related operating costs such as business expenses, interest, taxes, employee wages, cost acquisition expenses, marketing costs, and so on. Knowing your income is necessary in order to run a profitable business. This metric gives you an overview of how well your company is performing.
SaaS founders and business owners, in general, are more concerned with keeping income growth high because this is what investors or banks look at when measuring company profitability. Additionally, while high revenue might look good on paper, income growth is more difficult to achieve, but it’s definitely more valuable.
Calculating income is done successfully using the following formula:
When looking to pinpoint your company’s profit, you might stumble across a different metric quite similar to income, known as gross profit. While the two might be similar in the manner in which they are determined, as the formula entails subtracting expenses, Gross Profit considers only the production and distribution costs. A company’s income considers the money generated from the sale of goods and services after deducting all expenses.
The best way to grasp the difference between these essential metrics is to look at a specific example.
Let’s say Company X reported revenue of $100.000. The income, however, was $50,000. The difference between these two growth metrics is the expenses that needed to be covered. Now, let’s take it up a notch and offer some context. Let’s assume that these numbers are higher than what Company X reported as growth the previous year. This means that the company is doing well, even though the difference between net income and revenue is significant.
However, when looking to identify whether or not your SaaS company is doing well, the indicator should always be net income and not revenue.
Company X can achieve top-line growth (revenue measured) and bottom-line growth (income measured) in multiple ways. For instance, a product launch can generate revenue growth, whereas reducing operational costs can trigger a bottom-line increase. It’s important to note that revenue growth can be a short-lived victory because it’s usually triggered by a particular event. Income increase is the long-term metric you want to keep your eyes on because it’s usually indicative of improving systems and lowering expenses.
Grasping the distinction between income and revenue is important for several reasons:
Both metrics offer valuable insights into how a company is performing. Revenue and income give analysts and investors a way to assess a business’s growth and profitability potential, as well as verify its operational costs and financial health.
Since these metrics look at growth from two different perspectives, before deducting expenses and after, business owners can identify which revenue streams are performing better, generating more profit and income.
The saying, You need to spend money to make money could not be more accurate.
Running a successful business means dealing with all the expenses as well as profit. But how do you know when you’re overspending and under profiting?
Recognizing the differences between revenue and income can help you to budget correctly and keep your business expenses under control. While revenue gives you a complete picture of your total earnings, income shows you how much you are spending. By constantly keeping track of this metric, you can identify the business areas that need optimizing and improving your business performance.
You might be tempted to believe that revenue isn’t especially relevant in this equation. However, that is not really true because, without the big picture, you wouldn’t be able to track the improvements you are making in terms of cost optimizations.
Allocating resources is something most businesses struggle to achieve. Adequately managing this task implies metric analysis. Without this data, SaaS owners cannot forecast profits and expenses, nor can they plan their resources. Not knowing how much your business is making and spending makes it virtually impossible to prioritize strategies.
Being aware of the key differences between revenue and income in terms of how they are calculated and what their growth means gives business owners the needed tools to create realistic financial plans and set achievable goals.
Moreover, having insights regarding these two growth metrics plays a crucial role in the process of decision-making. Whether you are evaluating business opportunities, product success, or strategies that can directly contribute to your company’s revenue and long-term profitability, and income always needs to be carefully considered.
Tax and compliance management heavily takes into consideration these two metrics. Typically when determining a company’s tax obligations, the metric used for calculations is the net income and not revenue.
While following various tax and compliance regulations can require a lot of knowledge and experience, it’s a requirement that cannot be dismissed. So, understanding the difference between the two will help you accurately report tax, avoid hefty fines and remain compliant with all financial regulations.
With revenue being higher than income, wouldn’t you prefer that investors would ask you to show them those numbers? Unfortunately, investors want to see the real profitability pictures, which is, of course, net income. Even though revenue looks great on paper, net income is the real deal when tracking business health and profitability since operational expenses must be monitored and subtracted.
Besides doing the necessary calculations required to run a business, it’s beneficial to clearly communicate the difference between these two metrics while offering details on various strategies that can optimize costs will allow you to build trust and foster strong and positive relationships with stakeholders.
Estimated to reach $1.5 trillion by 2025, it’s no longer news to anyone that this is a subscription economy, and the worldwide pandemic made it clear that monthly recurring revenue will be wearing the crown for a long time from now on
The fascination around this business model is easily explainable through two clear arguments:
It ensures ongoing income.
It can grow the customer base leading to increased earnings.
But that’s not all, there is more that makes this business model the preferred option among so many SaaS businesses. One of the reasons why the subscription economy has gained so much popularity is because of its consumers.
Yes, customers are just as much in love with subscriptions as SaaS business owners because of the convenience. With SaaS apps making 70% of a company’s total software use, maintaining constant access to the systems that help run a business in an easy way (having to add purchasing details a single time) and the reason customers continue to say yes to subscriptions.
Now let’s look from the business owner’s point of view... What makes the subscription model so incredibly appealing, and why is it so relevant in the context of revenue-income growth?
One of the main advantages is a constant, uninterrupted (more or less) stream of recurring revenue. Customers are charged monthly or yearly, and they are generally locked into a long-term contract. This is the detail that makes the difference.
Because of the long-term contract, the subscription model allows better forecasting and keeps revenue numbers reliable - both key reasons for investors to perceive a business as more attractive.
With the right systems in place, scaling subscriptions is simpler to achieve than with any other business model out there. Because subscriptions give you access to a large and growing customer base, increasing your earnings can be easily done through smart promotion management. Cross-sells, upsells, and discount codes all are tools worth using.
Additionally, through localized payment experiences, specifically, optimized checkout pages containing local payment methods, currencies and languages, increasing the customer base is an easily achievable goal. Plus, a streamlined post-checkout process, containing automated payment processing, invoicing and tax and compliance management fulfilled by one complete system instead of multiple third parties, helps significantly lowering operational costs.
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With access to a wide variety of high-performing localization tools, complete tax and compliance management, our AI-powered cascading system, and comprehensive fraud protection, businesses can gain customers in all parts of the world safely and with great ease.
Additionally, PayPro Global’s MOR offers complete subscription and billing management, packed with highly effective promotion management features. Our reporting and analytics system makes it incredibly simple to track all metrics, including revenue and income, while quickly grasping which areas are in need of optimization and which aren’t.
Income and revenue may be synonymous in certain instances, but they are far from the same. In fact, in the world of business, they are not interchangeable, and they provide two different sides of the same story. Grasping the difference between revenue and income, as well as continuously tracking them, is vital to ensure the overall financial health of your business.
Top-line, bottom-line, there is no question that growth can be interpreted in multiple ways. Developing strong strategies with the potential to increase your profit is only possible when understanding what works and what doesn’t.