Incremental Revenue

Incremental Revenue refers to the value of additional revenue of the company during the period under consideration if there is a change in sales quantity in the company and the incremental revenue is calculated by dividing the change in the revenue of a specific period by the change in quantity sold.

Incremental Revenue Definition

Incremental Revenue refers to the additional revenue generated from an additional quantity of sales. 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 on the basis of this baseline revenue. A baseline revenue level is a benchmark which would 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 the development of its cutting edge technology smartwatch. The watch is one of its kinds 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, once launched, they need to calculate the incremental revenue.

Pebble would first need to arrive at a baseline revenue level. This example does not take into consideration the factors of depreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. read more 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,

Incremental Revenue Example 1

= 40,000 x $200

Incremental Revenue = $8,000,000

The calculation of Incremental Cost will be –

Incremental Revenue Example 1.1jpg

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 of sales would result into 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 all of us have at least once added something to the cart and thought of buying it at some point in time in the future. Somehow we forget about the cart and the product we were to buy.

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

Most of us end up buying the product falling prey to the retargeting efforts put in by these websites. The cart you once abandoned has itself 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 product that was once pricey seems to be cheaper after the discount coupon.

These discount coupons and retargeting efforts are the results of incremental revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more. Once the amount of money that is 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 on 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 terms of sales volumes and marketing campaigns that are required to be made for the business to earn profits.

Conclusion

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