Incremental Revenue

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Incremental Revenue Definition

Incremental Revenue refers to the revenue generated from an additional sales quantity. The incremental revenue is used to analyze and compare the revenue generated by two different strategies. A baseline revenue level is established, and it is measured based on this baseline revenue. A baseline revenue level is a benchmark to ascertain the budgetary effects of changes in liabilities and revenue.

Incremental Revenue Formula

The formula is represented as below,

Incremental Revenue = No. of Units x Price per Unit

Examples of Incremental Revenue

Example #1

Pebble Technology Corporation is in the final stage of developing its cutting-edge technology smartwatch. The watch is one of its kind and is bound to be a hit in the market owing to its specifications that make it special among its rivals. Although Pebble is sure of making it big, they need to calculate the incremental revenue once launched.

Pebble would first need to arrive at a baseline revenue level. This example does not take into consideration the factors of depreciation and taxes. Pebble estimates a sale of 40,000 units. The selling price per watch is $200, and the cost of manufacturing a watch is $90.

The calculation of incremental revenue would be as follows,

= 40,000 x $200

Incremental Revenue = $8,000,000

The calculation of Incremental Cost will be –

Incremental Cost = No. of Units x Cost per unit

= 40,000 x $90

Incremental Cost = $ 3,600,000

In this case, the sales forecast of 40,000 units would be profitable for Pebble, which would bring in $ 4,400,000 of revenue.

With the help of this analysis, Pebble can then decide on how much sales would result in a profit and how much needs to be mandatorily spent on marketing activities to reach out to maximum people who would, in the end, turn out to be customers due to the marketing activities.

Example #2

Retargeting campaigns are perfect examples of incremental revenue. Online shopping has gained pace, and we have at least once added something to the cart and thought of buying it at some point in the future. Somehow we forget about the cart and the product we were to buy.

Online shopping websites capitalize on this! They send emails and notifications of the items you left in the cart. They have created this mechanism to remind you about the product you once wished to buy, but you ended up not buying it due to your reasons.

Most of us end up buying the product falling prey to the retargeting efforts put in by these websites. The cart you once abandoned made you a customer without your knowledge. Moreover, they also send timely vouchers for the specific products in the cart (Special Accessory / Electronics / Clothing / End of Season Discount Coupons). It would ensure that you buy the product like the once pricey product that seems cheaper after the discount coupon.

These discount coupons and retargeting efforts are the results of incremental revenue. Once the amount of money required to be spent on such marketing campaigns is identified, the businesses can go full-fledged to earn that additional profit.

Advantages of Incremental Revenue

They provide proof of return on the investment made in the marketing campaigns.
It has great potential in identifying how much should be spent on marketing and other publicity activities to generate additional revenue due to these activities.
Incremental revenue is a deciding factor in sales volumes and marketing campaigns that are required for the business to earn profits.

Conclusion

Incremental Revenue helps the management analyze and arrive at a decision on whether or not to adopt an alternative business plan to increase sales.
They give a clear picture of how an increase in sales would bring in revenue or result in higher costs.
Unlike marginal revenue, which focuses on the revenue generated per unit increase in sales, incremental revenue focuses on the revenue generated from additional sales (does not depend on per unit. For example, an additional sale of 500 units).
Businesses not only rely on marginal revenue for decision-making but also give equal importance to the inference arrived at by incremental revenue.
While launching a new product in the market, businesses must forecast the sales required for the product to be successful, for which marketing strategies need to be formulated. Incremental Revenue clearly shows how much to spend on marketing campaigns and how much to sell.
If it is higher than the incremental cost of manufacturing or buying a product, the business would make a profit and vice-versa.
Incremental revenue is the revenue earned from a marketing campaign conducted to promote the product.