Incremental revenue refers to the increase in revenue from a specific increase in sales or the additional return from one investment decision compared to another. It can also mean earning more money from the same customer or transaction, and can involve comparisons of different investment options. Marginal revenue is the additional revenue that would be earned by selling one more unit beyond current sales levels, and prices may have to fall to generate additional sales.
Incremental revenue is a financial term that can be used for a variety of meanings. In its purest form, it simply means the increase in revenue from a specific increase in sales. It can also be used to refer to the additional return from one investment decision compared to another. In marketing and planning terms, it can mean the process of earning more money from the same customer or transaction.
The pure economic definition of incremental revenue is a term related to the concept of marginal revenue. Marginal revenue is the additional revenue that would be earned by selling one more unit beyond current sales levels. Incremental revenue is simply the total additional revenue from a given increase in sales. It must be divided by the number of additional sales to produce marginal revenue.
Although it may seem that the marginal or incremental revenue would simply be the same as the current price, this is not the case. This is because marginal revenue is calculated on the basis that underlying demand does not change. Therefore, from an economic point of view, prices will have to fall to generate additional sales. From a practical standpoint, upselling can mean selling more to the same customer, who then qualifies or negotiates a volume discount.
A second meaning of incremental income involves comparisons of different investment options. The term simply refers to the difference in the performance of one option over another. This can be a historical comparison or you can rely on forecasts when making an investment decision. Someone looking at multiple options will often weigh the incremental revenue against the additional risk expected from one option over another.
In a business context, this type of income can mean earning additional income without increasing costs or significantly increasing costs. An example of doing this without increasing costs is with airlines that have variable prices depending on when customers book. The airline may have a base price that is the minimum at which it will sell a seat. If a customer books later and pays a higher rate for a seat, the additional revenue is incremental revenue.
The term can also be applied in cases where both costs and profits increase. For example, a movie theater will always get at least the price of a ticket from a customer. You can also earn incremental income by selling popcorn or a drink. In this case, the costs for the cinema are higher, but so are both the revenue and the profits. It may even be possible to earn additional revenue from a specific transaction, for example, upsell a drink so that the customer pays more to get a large serving instead of a regular size serving.
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