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"Incremental revenue" and "profitability" aren't sexy terms." But, of course, they are key metrics to understand the success of your campaigns, initiatives and overall business.
In this article, we'll define incremental revenue and incremental profitability and then highlight tips for maximizing your efforts.
Revenue is the money your business generates through regular operations. Incremental revenue is the additional money you make from increased sales or production. This metric can help businesses understand the return on investment (ROI) and the impact of new products, marketing campaigns, pricing strategies or other business development efforts.
To calculate incremental revenue, subtract your baseline revenue from your new revenue within a given period. This shows the change in revenue based on a decision, action or campaign.
Incremental revenue formula = new sales - baseline sales
Incremental margins, on the other hand, show how changes in sales volume impact your profits (or revenue after factoring in costs). It specifically shows the profit made from selling an additional unit and helps brands understand the profitability of additional sales.
Incremental revenue and incremental margin help businesses make smart decisions and understand the effectiveness of targeted marketing campaigns.
While similar, incremental revenue and incremental profitability are different concepts. Incremental revenue is additional earnings without factoring in cost; incremental profitability is the additional profit—revenue minus expenses—linked to a specific decision or activity, like a marketing initiative. Understanding this metric helps marketers evaluate the effectiveness of their work and assess the impact of specific changes on the overall business profits.
To calculate incremental profitability, subtract the incremental cost from the incremental revenue.
Incremental profit formula = incremental revenue - incremental cost
The relationship between incremental margin and incremental profitability lies in their shared focus on analyzing the impact of changes in revenue and costs on overall profitability. Calculating incremental margin allows you to assess how efficiently you're generating profits from increased sales volume, which directly influences incremental profitability and overall financial health.
Now that you understand what these terms mean—and why they are vital metrics for marketers—let's discuss a few ways to maximize your incremental profitability.
You always want to know which of your products or services have the highest margin or the most revenue with the lowest expenses. Then, you can work to prioritize those products to maximize incremental profitability through:
In short, knowing these metrics helps leaders know where to focus their efforts for maximum outcomes.
Incremental profitability helps you analyze and optimize pricing strategies by providing insights into the true impact of pricing decisions on the company's bottom line. Again, if you know your products' margins, you can more confidently set or raise prices, build discounting strategies and increase overall revenue and profits.
Additionally, by evaluating the incremental profitability of different pricing strategies, brands can optimize pricing models to ensure that each product or service contributes positively to your overall profitability.
Create a pricing strategy schedule to ensure you regularly check in on margins, profits and prices.
While revenue is all about sales, profitability is just as much about controlling costs. You can even increase your margins by finding ways to reduce expenses and increase efficiency within production.
By understanding your metrics, you can see where opportunities lie.
Brands can streamline costs by allocating resources intelligently, streamlining production processes and prioritizing high ROI activities. However, you may also choose to discontinue certain high-cost products or change the product to use more cost-effective materials.
Incremental profitability can provide insights—and potential financial impacts—to support exploring new revenue streams or markets. By understanding the incremental profitability of new products, services or market expansions, brands can assess the potential additional profit generated from these ventures.
This analysis helps in making informed decisions about your products. Focusing on high-margin opportunities that contribute positively to overall profitability can help you prioritize the most lucrative areas for business expansion.
Another opportunity exists in increasing customer value through cross-selling or upselling. When your existing customer base increases their spend, you will see increased revenue and profitability without adding new products or decreasing costs.
Generally, you'll prioritize high-margin products in your up or cross-sell tactics. But be sure to only offer products that will provide additional value to the customer or align with what the customer has already—or historically—purchased.
This requires a modern marketing tech stack and customer data platform (CDP) that understands your customers and prospects as individuals across platforms and channels.
To create effective marketing campaigns that focus on high-margin products and upsell opportunities, you need to truly know your customers and prospects and be able to reach them online and off.
Epsilon Retail Media helps you maximize your reach while protecting your budget. Once you understand your incremental revenue and profitability, use Epsilon Retail Media to drive meaningful business outcomes.
