Revenue productivity measures the amount of income or revenue that a certain resource produces for a business. There are two ways to measure revenue productivity: by using the average revenue productivity and by using the marginal revenue productivity. The two show different ways of looking at the same business feature.
Average Revenue Productivity
The average revenue productivity measures the amount of revenue each resource unit produces on average. You calculate the average revenue productivity using the following formula: total revenue / number of units of resource. For example, assume a business employs 10 staff members, who produce 100 pairs of shoes. The business then sells each pair of shoes for $100, earning $10,000 for the entire stock. The average revenue productivity for the business's staff members would be $10,000 / 10, or $1,000. This means that each staff member generates $1,000 in average revenue.
Marginal Revenue Productivity
Marginal revenue productivity measures the extra revenue the business earns by adding another unit of a resource. For example, assume the business from the previous example employs one more staff member, who produces 10 more shoes. The business then earns $11,000. By employing another staff member, the business earns $1,000 more in revenue ($11,000 - $10,000). As such, the business's marginal revenue productivity at this point would be $1,000.
Revenue productivity often measures resources that have various rates of production and revenue generation. For example, the workers who produce the shoes in the previous examples may not all produce 10 pairs of shoes each. One staff member may produce only eight pairs of shoes, while another one may produce 13 pairs of shoes. As such, the average and marginal revenue productivity figures may vary when the business adds another resource unit.
Generally, both the average and marginal revenue productivity figures are small when the business uses a small number of resource units. As the business employs a larger number of resource units, the average and marginal revenue productivity figures go up. However, when the business uses even more resources, the average and marginal revenue productivity figures drop. As such, there is a certain optimum point, whereby the business maximizes either its average or marginal revenue productivity.
- "Business Economics"; T.R. Jain, et al.; 2009
- University of Denver; State Government Financing Study; 2011