Volume, Realisation and Revenues Explained

What Is Volume?

Volume is the quantity of goods or services a business sells during a specific period. It is the number of units sold, be they are cars, mobile phones, tonnes of steel or any other product or service.

For example, if a car manufacturer sells 50,000 vehicles in a quarter, that is the volume. If a coffee shop serves 1,000 cups per week, or a salon does 100 haircuts in a week, that is its volume. Volume is straightforward. It is just counting how many items went out the door.

Volume growth is generally positive news for a company, as it indicates increasing market share or growing demand. However, volume alone just tells half the story and without understanding the other two terms, one can’t simply arrive at any conclusion. Only volume doesn’t talk completely about the company’s financial health.

Understanding Realisation

Realisation is the average price at which a company sells its products or services. It's also called the ‘average selling price’ or ‘price realisation’. This figure shows how much per unit product or service was sold.

Calculating realisation is simple,

Realisation = Total Revenue ÷ Total Volume

Using a car manufacturer example, 50,000 cars × ₹20,00,000 per car = ₹1000 crores in revenue

This simple equation reveals an important business truth, companies can grow revenues in two ways,

By selling more units (volume growth)

OR

By charging higher prices (realisation improvement).

The best scenario is when both increase simultaneously.

Realisation can change due to various factors,

• Product mix -If a company has products or services of different price points, selling more premium products increases average realisation
• Pricing power - Strong brands can charge higher prices
• Market conditions - Supply and demand affect what customers will pay. More demand, limited supply can increase prices
• Discounts and promotions - Sales offers, decrease selling prices and reduce realisation
• Currency fluctuations - For exporters, currency exchange rates impact realisation. If the rupee strengthens, the same product will bring fewer American dollars.

A company might see volume growth but declining realisation if it's offering heavy discounts to attract customers, which could indicate competitive pressure or weakening demand.

What Are Revenues?

Revenue is the total income a company generates from selling its goods or services before deducting any expenses (like interest, taxes, depreciation etc)

The relationship between these three concepts is straightforward, Revenue = Volume × Realisation

Using our car manufacturer example, 50,000 cars × Rs. 20,000 per car = Rs.1,000 crores in revenue

This simple equation reveals an important business truth, companies can grow revenues in two ways, by selling more units (volume growth) or by selling higher prices (realisation improvement). The best scenario is when both increase simultaneously.

Why This Matters for Analysis

Understanding these three facts of business helps investors and analysts assess reveals realistic picture. Consider these scenarios,

Scenario 1 - A company reports 20% revenue growth. This happened due to 25% volume growth but 4% decline in realisation. This suggests that the company is gaining market share through discounted pricing. So, this revenue growth might not be sustainable in the long term.

Scenario 2 - Revenue grows 15%, with 5% volume growth and 10% increase in realisation. This is considered an ideal scenario where revenue is growing due to an increase in selling price and selling volume. It's considered healthy and sustainable because, despite growth in prices, sales still went up.

Scenario 3 - Revenue stays flat, but volume drops 10% whilst realisation increases 11%. The company might be selling at premium rates. Volume drop suggests that some customers are price sensitive and the business might be losing those customers.