What is Incremental Revenue?

Incremental revenue is a financial term that can be used for a variety of meanings. In its purest form, it simply means the increased revenue from a specified increase in sales. It can also be used to refer to the additional return from one investment decision compared with another. In marketing and planning terms, it can mean the process of making 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 brought in by selling one more unit beyond the 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 extra sales to produce marginal revenue.

Although it might seem that marginal or incremental revenue would simply be the same as the current price, this isn't the case. This is because marginal revenue is worked out on the basis that underlying demand doesn't change. Therefore from an economic standpoint, prices will have to drop to generate additional sales. From a practical standpoint, additional sales might mean selling more to the same customer, who then qualifies for or negotiates a bulk discount.

A second meaning of incremental revenue involves comparisons of different investment options. The term simply refers to the difference in the return from one option over another. This can be a historical comparison or it can be based on forecasts when making an investment decision. Somebody analyzing multiple options will often compare the incremental revenue with the additional risk expected from one option over another.

In a business context, this type of revenue can mean getting additional revenue either without increasing costs at all, or without increasing costs significantly. An example of doing this without increasing costs at all is with airlines that have variable pricing 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 fee for a seat, the additional income is incremental revenue.

The term can also apply in cases where both costs and profits rise. For example, a movie theater will always get at least the price of a ticket from a customer. It may also get incremental revenue by selling popcorn or a drink. In this case the costs to the movie theater are higher, but so are both the revenue and the profits. It may even be possible to get additional revenue from a specific transaction, for example upselling a drink so that the customer pays extra to get a large rather than a regular-size serving.