When businesses need to measure profit, they often consider the number of units sold for a set price. Incremental revenue is a way companies calculate the additional profits generated from increased sales.Learning about incremental revenue can be helpful for professionals in a variety of fields, especially marketing and sales. In this article, we define incremental revenue, give you the formula to calculate incremental revenue and provide examples of how this method can be used in the workplace.
What is incremental revenue?
Incremental revenue is the profit a business gains from an increase in sales. It can be used to determine the additional revenue generated by a certain product, investment or direct sale from a marketing campaign when the quantity of sales has grown.
Incremental revenue is often compared to the cost of a product. Businesses try to make sure the incremental revenue is higher than a product's incremental cost in order to generate a profit. Since incremental revenue doesn't account for overhead costs, companies use it mainly to look at overall profit margins.
Businesses use incremental revenue to calculate profit in the following areas:
Production: In manufacturing, incremental revenue is measured by the number of products sold at a certain price. Revenue is earned by additional sales or a change in the sales quantity.
Marketing: In marketing, incremental revenue is calculated from the additional sales generated by advertising efforts. Incremental revenue help business professionals determine the return on investment (ROI) from a marketing campaign. Data from incremental revenue calculations can also help business owners decide how much to spend on marketing in order to generate a certain amount of sales.
Investing: Investors use incremental revenue as a formula to analyze and compare which portfolio options bring in the best rate of return. This helps them determine where to allocate their finances.
The difference between marginal and incremental revenue
Incremental revenue and marginal revenue both calculate sales, but they differ in the number of sales taken into account. Incremental revenue is focused on sales generated by multiple units, while marginal revenue is calculated by analyzing the profits from the sale of one additional unit. While both types of revenue can be used for making business decisions, marginal revenue calculations are smaller in scope. Incremental revenues give a larger perspective of profits a business generates based on what it produces and sells.