total revenue test
Here is the question that keeps shop owners up at night: if I change my price, will I end up with more money or less? It's not obvious, because raising the price earns more on each sale but loses some customers, while cutting the price wins customers but earns less on each. Total revenue — the price multiplied by the quantity sold — is the money that actually comes in, and the total revenue test is a quick way to see which way it will go, using elasticity.
The rule is short. When demand is elastic (buyers are price-sensitive, elasticity above 1), price and total revenue move in opposite directions: cut the price and revenue rises (you gain more customers than you lose margin), raise it and revenue falls. When demand is inelastic (buyers stick around, elasticity below 1), price and total revenue move together: raise the price and revenue rises (you barely lose customers), cut it and revenue falls. At unit elasticity (exactly 1), total revenue is at its peak and a small price change leaves it unchanged. A quick number: sell 100 units at 10 dollars for 1,000 in revenue; drop the price to 8 and if sales jump to 150, revenue rises to 1,200 (elastic, the cut paid off); but if sales only creep to 110, revenue falls to 880 (inelastic, the cut backfired).
This is one of the most useful practical tools in all of pricing. It explains why a cinema slashes midweek prices (elastic demand — fill the seats and earn more) but a pharmacy doesn't discount essential medicine (inelastic — discounting just throws money away). It also reveals the classic farmer's paradox: a bumper harvest, by flooding an inelastic market, can drag the price down so far that farmers collectively earn less than in a poor year. The honest caveat: total revenue is not profit — it ignores costs. A price cut that lifts revenue can still lose money if making those extra units costs more than they bring in.
A streaming service tests a price cut. Subscriptions surge enough that monthly revenue rises — demand was elastic, so the lower price paid for itself. A toll road tries the opposite: it raises tolls, traffic barely drops, and revenue climbs — demand was inelastic.
Elastic → cut the price to earn more. Inelastic → raise it. The test tells you which.
Total revenue is not profit. The test tells you what happens to money coming in, not money left over after costs. A revenue-boosting price cut can still shrink profit if the extra units cost more to make than they earn.