What is Gross Sales?

If you're running a business, then you don't need me to tell you the importance of tracking your sales metrics. After all, the lifeblood of any business is your sales numbers. However, there are a few different ways that we can look at even the most basic sales metrics. Here, we'll discuss gross sales. What it means, it's general usefulness, it's specific utility, how it plays with other metrics, and some of it's limitations. This will be overkill. But sometimes that is good. Let's get into it. 

So What Are Gross Sales?

Gross sales is a foundational metric in the health of your business. It provides you with an insight into the overall demand/market interest in your products or service. 

It's really that simple. How many units did you sell, and what was the average price? Knowing these two things will help us calculate the gross sales. 

How Do I Calculate Gross Sales?

Super easy. As we said above, it's just the total revenue that's brought into the business. This is before you take out any deductions due to discounts, returns, or anything like that. So it's the most basic equation you'll see in an introductory economics or business course:

However, don't forget how we defined this above - before any deductions. This is the full price at which the item is valued in the market, regardless of whether it actually sold at this price. That means that our Price variable here needs to be the original listed price. In other words, if we listed our product for $100, then offered a $20 off coupon, making the price the customer pays $80, we would still be using $100 for the purposes of our gross sales calculation. 

Luckily, the quantity part of this equation is straightforward. It's just the total number of units sold. Doesn't matter if they were sold with a discount applied, or if they were returned. If they were sold at all, for any amount, they're counted here in our calculation. If we wanted to, we could even get more direct with our equation and make it instead read as:

Why Don't We Subtract Discounts?

As of right now, you may still be wondering why we're not subtracting discounts from the price in our gross revenue calculation. That's because our gross revenue metric is addressing the total potential revenue, not the actual revenue that would be reported in your financials. 

Once again, gross sales revenue helps you understand the total sales volume generated by the business. The insights here are definitely different than what you'd find in net sales revenue. Here, we are attempting to learn more about the total reach into the market, and the overall demand before we account for any of the concessions that led to the actual revenue for the business. Make some sense? Hopefully we're making progress. Let's use an example to round out this section.

An Example of Calculating Gross Sales Revenue

Let's consider that we're a bakery that only sells cakes. Each of our cakes is listed at $30. We know that we sold 100 cakes through the month of September. With this information, we can quickly calculate the gross sales revenue by taking that listed price of $30 and multiplying it by the total number of cakes we sold (100) within the month. That gives us a total gross sales revenue of:

This number gives you the total market activity of your cake business. Again, we're not considering here that you offered a "back to school discount" on cakes for the first week of September that was a buy one get one half-off deal. Again, our gross revenue doesn't care about the discount that was applied. We ignore any and all discounts, returns, or other allowances that could impact our net revenue.

Why is Gross Revenue Useful?

In broad strokes, gross sales provides a peak into your business's market engagement and the scale of operation. It has some standalone value, as we covered previously in looking at the potential within the market. However, it is also useful when combined with other metrics to create a clearer picture of the overall health of your business. As with most metrics, we have the cliche answer that it becomes more useful when viewed as part of a picture, rather than the whole thing.

Understanding Market Reception

One of the primary functions of gross sales is to serve as an initial indicator of how well your product or service is being received by your market. By using the total sales volume that we calculate with gross revenue, we can begin to gauge the overall interest or demand for our product or service. This can be particularly useful as you track this metric overtime, helping you identify if the interest is improving or waning. 

If we see that gross revenue is increasing year-over-year, it may be an great sign that our business is continue to grow and gain market share. If, instead, it is decreasing, it may tell us that we need to take a deeper look. Maybe our message-to-market fit has become worse. Maybe there is a new competitor that is harming our sales. Maybe this is just a down year. The details of this decrease (or even increase of that matter) is not provided by gross revenue. Rather, it serves as an indicator that you may want to look more deeply at certain parts of your business. 

Assessing Business Scale and Reach

By understanding your gross sales, you'll have an idea of the breadth of your business. Again, this isn't a metric that provides a lot of "deep" insight. But it does serve as a general benchmark for the health of the business. Again, allowing you to see how widespread your business is - capturing your marketing penetration and customer reach. 

As with the market reception, the value of tracking gross revenue increases with time. With more data, you're able to identify trends in gross revenue, seeing if your business is expanding or contracting in terms of scale or reach. 

However, this doesn't only have value in a year-over-year or month-over-month context. It can also be useful to identify how your gross revenue fluctuates seasonally. Seasonal trends may be something you are able to identify without explicitly tracking gross sales, but tracking it can't hurt. In fact, you may perform better in some months relative to others than you anticipated. 

Marketing and Sales Effectiveness

In general, we know that sales are the lifeblood of any business. Understanding the performance of your marketing team, marketing campaigns, or sales team or sales campaigns, can be a daunting task. At first, it may seem easy and straightforward, but the more you dive into the details of statistical analysis and A/B testing, you may realize there is a lot more to it than you thought. But that's okay, because depth isn't the goal of understanding gross sales revenue. 

If we consider gross sales again, we know that it doesn't take into account discounts. So, this can be particularly helpful in understand the reach of a marketing campaign. Are we selling more units due to this marketing campaign than we are relative to another one, or before we started it? That question may seem too basic on the surface. To be honest, there probably is more nuance that will help provide a much clearer picture. However, addressing that basic question in terms of gross revenue kickstarts the process of understanding the details of the marketing campaign performance and if we should invest more into the campaign, cut it short, or consider running another one. 

Deeper Insights by Combining with Other Metrics

As we've mentioned multiple times in this section, gross revenue is a valuable first step toward understanding your sales numbers. It becomes more effective when viewed as a "pointer" or "roadmap" into where to look within your business. Increasing gross revenue - maybe you're all good and can evaluate if you should be doing more of what you've been doing recently. Or maybe your efforts are just continuing to pay off. Decreasing gross revenue - maybe you need to be looking at recent changes, new competitors, or what is potentially causing the decrease in units sold (assuming that you didn't decrease the list price for your products). 

Again, that gives us the initial picture, but there is plenty more to dive into before we start taking action. Let's take a look at just a few of the other metrics we can use alongside gross revenue to make informed decisions within our business.

Comparing Gross and Net Sales

As mentioned before, net sales is the next step in evaluating your revenue. Gross sales gives us the idea of the overall potential within the marketplace, capturing the total sales regardless of discounts, returns, or other allowances. Net sales offers a more financial look at the sales. These take into account the discounts, returns, and other allowances. So net sales paints a clearer picture of the money actual brought in to the business. If we just think about the difference between gross sales and net sales, we'll be able to understand the impact of these concessions (discounts, returns, and allowances). 

The action you take from evaluating the difference between gross and net sales will be different for each business. Your objective will largely tell you if the difference is unexpected relative to the goals you're trying to accomplish in that moment. Maybe you're trying to acquire a heavy list of new customers and to do so, you're offering steep discounts. This would result in a sharp difference between gross and net sales. But again, maybe that wouldn't be a problem. 

Correlating Gross Sales with Marketing Spend

Another way to utilize gross sales with additional business metrics would be to compare it with your marketing spend. In theory, we would expect that our gross sales should increase as we increase our marketing spend. But we also want to be capturing the proportional increase, or the correlation between marketing spend in gross sales. Said plainly, for every $1 increase in marketing spend, how many dollars can I expect back in gross sales? This is also easily conceived as a "Return on Investment" of your marketing spend, or more directly Return on Marketing Spend. 

Limitations of Gross Sales

We've discussed the limitations of gross sales throughout the article to this point. However, the limitations are quite significant, so they do warrant their own section. At it's most basic level, you're probably already on board with the fact that gross sales will overestimate the performance of your business. The reason for the overestimation, an incomplete picture of revenue, is a limitation itself. Finally, it doesn't provide any usefulness in terms of considering profitability. These three limitations are not entirely exhaustive, but the blind spots created from these make them the most important to understand from the start. 

The risk of overestimation should be pretty self-explanatory given the definition we provided earlier. Recall that gross revenue ignores any discounts, returns, or other allowances. So by definition, if we've had any returns, applied any discounts, or offered any other concessions, our gross revenue will provide us an inflated view of the revenue within the business. 

If we fail to account for this aspect, then we may consider our business to be in a much stronger position than it is in reality. Unfortunately, if you solely focus on gross revenue, you may not be aware of underlying financial concern, strain, or challenges until it's too late. 

This risk of overestimation speaks to a larger issue of an incomplete (or improper) estimate of revenue. Again, this incompleteness means that you will be running the risk of thinking your business is in a stronger financial position than it actually is. Leading to you potentially overinvesting in your business. 

Finally, it's important to remember that gross sales does not in any way equate to giving you an idea of profitability. This gross sales number provides some top line information in your financials. But don't forget that we're not including any information about costs. This should be evident because we aren't even considering discounts in gross revenue. However, it bears mentioning.

Unique Benefits of Gross Sales Analysis

Now that we've discussed gross sales generally and mentioned it's limitations, let's talk about some specifics of what we can do with this metric. 

Market Pulse Indicator

As we've mentioned, gross revenue serves particular usefulness in evaluating the overall acceptance of your product/service within the market. Capturing the total sales volume. This can be exceptionally useful in the spotting of different trends. Gross revenue can serve as an early or leading indicator of market trends or shifts in consumer preferences. By keeping an eye on this metric, you'll be able to quickly identify emerging patterns that are relevant to your business. Early identification of surges in demand for specific products or services (or even variations of those products/services) can help you capture a larger share of the market if the trend continues. 

A Tool for Short-Term Projections

Related to serving as an indicator of potential emerging trends, gross sales can also provide some insight in terms of sales forecasting. Since it serves as a pulse for current conditions, it can help you identify immediate increases or decreases in sales volume. This can be useful for inventory tracking, or even for helping you identify the ideal time for certain marketing campaigns. Combining this short-term insights into a longer-term view, you can begin to see trends that consistently occur. This can help you be more proactive in your planning, rather than exclusively being responsive to currently evolving changes - which may cause you to overreact to short-term fluctuations. 

Let's add to this the capability of gross revenue to serve as an indicator for how well a new product or service is being received, or for immediately evaluating the impact of new marketing initiatives. This is worthy of a deep-dive itself, so we'll save a majority of this discussion for a later date. 

Benchmarking

As we've mentioned in each of the sub-sections above - the benchmarking nature of gross sales is one of it's biggest advantages. As with most other metrics, tracking it over time will provide you with the most insight. Gross sales, however, has a unique benefit of being one of the easiest-to-understand and easiest-to-calculate leading indicators of your business. It can help you quickly identify what is normal in certain circumstances. Whether that's comparing a current marketing campaign to previous ones; comparing the seasonality over multiple years; or evaluating the continued success of certain products or services, gross sales can be one of the first indicators for a changing market or changing consumer behavior. Again, it doesn't tell you why these things are happening. And because it is a simple measurement, it won't even be easy to break it down further without a decent amount of additional work. However, it can point you in the right direction to start digging deeper to find more clear and comprehensive answers. 

Conclusion

In this deep dive into gross sales, we've explored its fundamental role as a metric in the business landscape. It stands as a straightforward yet powerful tool, offering insights that are both broad in scope and immediate in application. As a business owner, gross sales are a quick and easy way to get a glimpse of your business's market activity, enabling you to grasp the extent of your reach and the market's response to your products or services.

By integrating gross sales with other financial metrics, you can paint a more complete picture of your business’s health and trajectory, guiding you towards informed, strategic actions.

Remember, in the world of business analytics, no single metric tells the entire story. Gross sales is a chapter in a larger book, one that includes various other financial and operational metrics. As we continue this series, we'll explore these other metrics, helping you develop a nuanced understanding of your business's performance and potential. Stay tuned as we delve further into the world of business analytics, where data becomes the language of growth and success.