How Do I Calculate Incremental Revenue?
Incremental revenue is the increase of funds between a new or complimentary project or service over the previous revenue of the initiative. The calculation looks at the additional revenue generated from promoting the line versus the marketing costs associated with promotion. The calculation requires evaluating the basics, creating a baseline and subtracting costs.
- Evaluate the basics
Incremental revenue analysis requires identifying the initial outlay, cash flows from undertaking the project, the value of the new project and the timing and scale of the project. Analyzing the costs versus the expected benefits of the new project is the basis of incremental revenue analysis. A positive incremental revenue is a strong indication that the organization should undertake the new project.
- Create a baseline
Add the total revenues from the initial projects or services for a set timeframe, such a fiscal quarter or year. This figure serves as the basis for the incremental revenue calculation. Then, calculate the expected total revenues gained from introducing the new campaign, service or complimentary product. Use a comparable time period for both revenue calculations. Take the additional revenue and place it over the initial revenue to view the gross incremental revenue.
- Subtract costs
Compare the costs, both fixed and variable, under both initiatives for a fixed time period. Measure the additional costs verses the additional revenue to view the incremental revenue. If the additional costs exceed the additional revenue, the project should not be undertaken. Be sure to analyze the opportunity costs, revenue differences, cost differences and cost savings differences when deciding whether to take on the new project.