Practical stock researchModule 1, lesson 2 of 23
Products, customers and revenue drivers
How to split revenue growth into volume, price and mix, read segment reporting, check customer concentration, and find the numbers that drive results.
In this lesson
- Break revenue growth into volume, price and mix.
- Use segment reporting to see which parts of a business drive results.
- Assess customer concentration and why it matters.
- Identify the key operating drivers for different kinds of business.
Builds on
- How to research a company from scratchUnderstanding products and customers is the first step of the research process.
On this page
In simple terms
"Revenue grew 12%" is a headline, not an explanation. To understand a business, you need to know why it grew: more customers, higher prices, better products, an acquisition, or one large order. Each tells a different story about the future.
Volume, price and mix
Revenue is roughly the number of units sold times the average price. Average price itself depends on like-for-like price changes and the mix of products sold.
Worked example: A made-up consumer company
| Year 1 | Year 2 | |
|---|---|---|
| Units sold | 100 crore | 103 crore |
| Average price | ₹10.00 | about ₹10.87 |
| Revenue | ₹1,000 crore | about ₹1,120 crore |
| Total growth | 12% |
|---|---|
| Volume growth | 3% |
| Like-for-like price increases | 6% |
| Combined: 1.03 × 1.06 | 1.092 |
| Mix effect: 1.12 ÷ 1.092 − 1 | about 2.6% |
Most of the growth came from price and mix, not from selling more. Price-led growth can stop when customers resist; volume growth from new customers is often more durable.
Companies often describe these effects in the management discussion and on earnings calls, sometimes in percentages for each.
Segments
Companies report results for each operating segment, by business line or by region, as accounting standards require. Segment tables show revenue, profit and sometimes capital employed for each part.
Worked example: A small segment hides a big problem
A made-up company has two segments: a core business with revenue of ₹800 crore that shrinks 2%, and a new business with revenue of ₹200 crore that grows 25%.
| Core after a 2% fall: 800 × 0.98 | ₹784 crore |
|---|---|
| New after 25% growth: 200 × 1.25 | ₹250 crore |
| Total revenue | ₹1,034 crore, up 3.4% |
The total grows modestly, but the core, four-fifths of the company, is shrinking.
Check whether segment profit tells the same story as segment revenue, and whether the company has changed how it defines segments, which can make comparisons difficult.
Customers and concentration
Ask who the customers are: consumers, businesses, governments, or a few large buyers. Customer concentration is a risk when a few customers account for a large share of revenue:
- Losing one can cut revenue sharply.
- Large customers can push prices down.
- Government customers may pay slowly.
Many companies disclose the share of revenue from their largest customer or top ten customers. If one customer provides, say, 30% of revenue, the company's fortunes are tied to that relationship.
The few numbers that matter
Every kind of business has a handful of operating numbers that drive most of the result. Finding them makes the financial statements much easier to understand.
| Business | Key drivers |
|---|---|
| Retailer | Number of stores, sales growth at existing stores, sales per square foot, gross margin |
| Bank or lender | Loan growth, net interest margin, credit costs, deposit growth, as the analysing banks lesson explains |
| IT services | Revenue per client, number of large clients, employee utilisation, attrition |
| Airline | Capacity, share of seats filled, revenue per seat-kilometre, fuel cost |
| Cement or steel | Volumes, price per tonne, capacity utilisation, energy cost |
| Subscription business | Subscribers, revenue per user, cancellation rate |
Companies often report these in investor presentations. Track them over several years, and be wary when a company stops reporting a number it used to show.
Why it matters
Understanding what drives revenue lets you judge whether growth is likely to continue, which numbers to watch each quarter, and which risks matter most. It turns the income statement from a list of totals into an explanation.
Limitations
Not every company discloses volumes, prices or customer shares, and definitions vary between companies. Mix effects can be hard to separate from price. Management's own choice of key numbers can flatter the business, so check them against the audited statements.
Common mistakes
- Reading total growth without breaking it down.
- Ignoring segment results.
- Overlooking dependence on a few customers.
- Using a driver that the company has redefined or stopped reporting.
Try it yourself
- For a company you are researching, find its segment table for the last three years.
- Calculate each segment's growth and share of total profit.
- From the investor presentation, list the three operating numbers that matter most and their trend.
- Find any disclosure of customer concentration and note what it implies.
Key takeaways
- Revenue growth comes from selling more (volume), charging more (price) and selling a different mix of products. Each has a different meaning for the future.
- Segment reporting shows revenue and profit by business or region. A small, fast-growing segment can hide a large, shrinking one.
- Heavy dependence on a few customers is a risk, because losing one can cut revenue sharply and gives customers bargaining power.
- Each kind of business has a few operating numbers, such as stores and sales per store, or loan growth and margins, that drive most of its results.
- Find these drivers in the company's own disclosures, and track them over several years.
Check your understanding
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Terms used in this lesson
- Segment reporting
- The breakdown in the notes of revenue, profit and assets by each separately managed part of a company's business.
- Customer concentration
- Dependence on a few customers for a large share of revenue.
- Revenue
- The money a business earns from selling its goods or services in a period, before any costs are deducted.
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This lesson is general education, not investment advice. Examples use made-up or clearly dated figures to explain ideas; they are not recommendations. Read the disclaimer.