The difference between marginal and incremental revenue
Both incremental and marginal revenue are used to determine sales, but the number of sales taken into account varies. While marginal revenue is determined by examining the profits from the sale of one additional unit, incremental revenue concentrates on sales produced by multiple units. Though business decisions can be made using either type of revenue, marginal revenue calculations are more limited in scope. Incremental revenues provide a broader perspective of the profits a company makes based on the products and services it sells.
For instance, to complete a year-end sales figure, an automaker might want to track the marginal revenue generated by the sale of one more vehicle. They could monitor the earnings from the sales of an additional 70 cars if they wanted to examine the incremental revenue.
What is incremental revenue?
The profit a company makes from an increase in sales is known as incremental revenue. When the volume of sales increases, it can be used to calculate the additional revenue brought in by a specific product, investment, or direct sale from a marketing campaign.
In the following areas, businesses use incremental revenue to determine profit:
How to calculate incremental revenue
Here is the formula for incremental revenue:
Incremental revenue = number of units x price per unit
Follow these steps to calculate incremental revenue:
Now you can compare the revenue to the incremental costs using this number to make business decisions. To determine whether your company is making enough profit from its sales, you can also perform additional calculations.
Examples of incremental revenue calculations
Here are some examples of how to generate additional revenue and use it for investing, marketing, and product sales:
Example 1
Go Walk Shoes hopes to gauge the additional revenue generated by their new running shoe during a rise in sales in the first quarter. From July to September, the CFO estimates that 20,000 pairs of Trail Tech Sneakers were sold. They also mention that the sneaker’s retail price at the time was $60. The CFO calculates incremental revenue at a rate of $1,200,000 by dividing the number of shoes sold (20000) by the cost of each shoe ($60). The CFO now determines that the business can boost Trail Tech Sneaker production for the upcoming quarter. They inform the marketing department of the shoe’s success and request that the group set aside a portion of their budget for a modest advertising campaign aimed at selling even more pairs of shoes over the following three months.
Example 2
A two-month advertising campaign was launched by a software company to entice customers to buy their antivirus software. As a result, the company recorded an increase in sales. The marketing team wants to calculate the campaign’s return on investment. According to data from the prior year, the senior marketing manager finds the additional number of units sold in sales records, which was an additional 5,000 units. They mention the software’s cost, which is $39 for each download. They calculate the incremental value of $195,000 by dividing the additional units sold (5,000) by the cost of the software ($39). The team can now compare the $195,000 in incremental revenue to the sum spent on marketing to determine whether the ROI is high enough to continue the advertising campaign.
Example 3
Over the next year, an investor wants to increase the size of their stock portfolio. They read financial analysis reports compiled by stock experts and research market trends. They take into account stock A, which had 5% more revenue than the previous quarter. They also examine stock B, which has a 6% increase in revenue. Due to the higher level of incremental revenue it produced in the prior quarter, they choose to purchase stock B.
Example 4
Great Taste recently introduced the Great Greens frozen health shake in 1,000 stores as a trial. After five months on the market, they want to assess the product’s performance. According to sales reports, they sold 800,000 units during the five-month period. Each unit cost buyers $4. 50. Great Taste is pleased to learn that it generated $3,600,000 in additional revenue for the product launch. They can now compare this to the Great Greens production costs to determine their overall product profit.
Incremental Revenue – Understanding your Business numbers
FAQ
What is incremental cost and incremental revenue?
- Calculate the volume of units sold during a period of expansion.
- Calculate the cost per unit sold during a period of expansion.
- Multiply the number of units by the price per unit.
- The result is incremental revenue.
What does incremental mean in business?
Incremental cost is the additional cost incurred by producing an additional unit of a good, and incremental revenue is the additional revenue earned from selling an additional unit.
What does incremental mean in sales?
What Does Incremental Mean in Business? Incremental refers to an increase that happens gradually. Given some specific benchmarks, it might increase your ad spend and product exposure over a predetermined period of time. The conversion that results from your marketing or promotional activity is known as an incremental sale.
How do you drive incremental revenue?
Incremental sales are a key performance indicator (KPI) used to evaluate the success of a marketing campaign. It is the difference between the sales you actually make during a particular promotion and the sales you anticipate you would have made over the same time period without the promotion.
