Definition of Incremental Revenue
Incremental Revenue (IR) is the extra Revenue from sales of additional quantities of a particular product using various mediums where additional quantities can be sold with the help of strong marketing techniques or digital marketing techniques, and it is calculated as additional units sold multiplied by the selling price per unit.
Explanation
IR is the additional Revenue from sales of other units where different units or additional sales can be determined as sales over and above the budgeted sales or quantity. The additional Revenue is generated by specific campaigns or channels like digital marketing, mouth publicity of products, advertisements, etc. It is the Revenue that the company may not achieve without a particular effort without marketing; the additional sales could not be possible etc. Various measures are to be taken to complete the additional Revenue; in the case of online selling by e-commerce companies, they show the items which we watch for shopping to increase the Revenue or if there is any item in the cart the e-commerce companies send the e-mails to remind to the customer this effort help them in additional sales. Incremental Revenue can also be achieved by introducing new products, and the Revenue generated due to the introduction of a new product is said to be total Revenue as it is achieved by extra efforts of introducing new products in the market.
Formula for Incremental Revenue
The formula for IR is determined as under:
Where IR is the Revenue generated from additional efforts like marketing, zero tolerance for quality, social media campaigns, advertisements, the introduction of new products, etc.
The number of units sold is the no of extra units sold because of additional efforts.
Examples of Incremental Revenue
ABC Ltd. has targeted sales of $ 550,000 for FY 2018-19, which the top management thinks is possible to achieve as per the capabilities of the organization. The company is expected able to achieve sales for FY 2018-19. During the Financial Year 2019-20, the target becomes $ 600,000. One of the managers suggested that if top management starts social media advertising and follows the zero tolerance with quality approach, the sales revenue can be increased by $ 50,000. Currently, the targeted units for sales for FY 2019-20 of the company are 6000 units, and the selling price is $ 100 per unit. If the selling price is constant, calculate the additional units that can be sold because of other efforts and determine the IR?
Solution:
Additional Sales = $ 50,000
Selling Price per unit = $ 100
Additional Units that Can Be Sold = Additional Sales / Selling Price per Unit
- Additional Units that Can Be Sold = $50,000 / $100
- Additional Units that Can Be Sold = 500 units
- Incremental Revenue = $50,000
It is achieved through the additional efforts of zero tolerance in quality and social media advertising, so it is IR.
Incremental Revenue Growth
IR growth can be measured as an increase in Revenue due to additional efforts divided by the budgeted sales.
For example, if the sales target was $ 500,000 and IR achieved was $ 50,000 due to additional efforts by the management.
The IR growth is calculated as under:
Incremental Revenue Growth = Incremental Revenue / Budgeted Revenue * 100
- Incremental Revenue Growth = $ 50,000 / $ 500,000 *100
- Incremental Revenue Growth = 10%
Incremental Revenue Analysis
IR analysis can be measured by the profit or loss from the incremental sales. If the total cost is greater than the incremental Revenue then there is a negative impact on the profit of the organization, and in actual terms, it is said that no benefits can be achieved due to incremental Revenue.
Whereas if incremental profit is positive i.e., IR is greater than the incremental cost and net results in increasing the net profit, then the total benefit is said to be achieved.
The benefits of IR can be measured from incremental profit.
Advantages
The advantages of IR are explained as under:
- It enhances the marketing skills of the employees.
- It enhances the normal capacity of the organization.
- It gives a beneficial position in the market due to IR.
- It gives the path about the marketing skills that can be used to enhance profit.
- More profits can be achieved with IR.
- IR enhances the efficiency of the employees as well as the organization as a whole.
- It gives a favorable position in the market due to sales beyond the capacity and capability of the organization.
Disadvantages
The disadvantages of IR are explained as under:
- Most organizations only take the increment revenue into account, whereas incremental cost is ignored, which creates the myth in the minds of management that the organization is benefiting from the IR whereas the organization might suffer a loss from the IR.
- Cost can be increased due to IR for achieving incremental Revenue; the incremental cost can also be incurred.
- The organization may suffer a loss because of incremental Revenue if the cost of earning incremental Revenue is greater than the profits of the organization, and this might negatively affect the decision of the investors.
Conclusion
IR is the Revenue achieved due to additional efforts by the organization. And additional efforts include advertisements, social media campaigns, the introduction of new products, zero-tolerance with sales, etc. IR can affect positively as well as negatively to the organization. The effect on the organization can be measured from incremental profits; if there is a positive profit due to incremental sales, then the IR is said to have a positive impact, whereas if there is a net loss from the IR, it can have a negative impact, especially on the decision of the investors. IR is calculated as the number of additional units sold multiplied by the selling price per unit. Whereas benefit from IR can be measured as incremental revenue less incremental cost, if the result is positive, the incremental benefit is said to occur or vice versa.
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