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The Total Revenue Test is a method of quickly calculating whether or not a product has elastic or inelastic demand. Simply put, an entrepreneur or manager can simply look at the total revenue created from a product using the income statement from month to month to determine a sound pricing strategy. This can be set up like a science experiment. The entrepreneur makes a hypothesis of whether or not the change in price will either increase or decrease total revenue in that category. They run the experiment of changing the price of the product lower and higher month over month to see the resulting change in revenue. The text mentioned that to determine if a product is elastic or inelastic you simply need to see how it impacts the total revenue. If the total revenue moves in the opposite direction as the change in price the product has elastic demand. However, if the total revenue changes in the same direction as the price change the demand is inelastic. Based on this experiment the entrepreneur can identify how customers will react to the pricing changes in the future, all else holding equal. The entrepreneur can then test different pricing levels to maximize profitability for that product category. this is a very important and simplistic test that any of us can utilize in the future to improve our businesses financial condition. Simply put, if our product is a necessity and the demand is inelastic we can charge higher prices to get increased levels of revenue. However, if our product is elastic, we would be better off going with the low-price leader strategy.
How might you use this concept in your current workplace?
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