Revenue. That’s one thing we look up to check a company’s potential. Let’s say you hear a lot about a company. You’d say, let me check how much the company makes. And it makes sense, too. Furthermore, it makes sense why companies run after ways to generate incremental revenue.
Wait, wait, wait! Wondering why we threw that term out of nowhere? Well, we understand your surprise. But we will talk about that term in quite detail in this article. In fact, if the title of this one is anything to go by, you will hear a lot about those two terms.
Things tend to get slightly complicated on the philosophical end of business and profit. And in this article, we will do our best to try and end the confusion regarding one question. Incremental revenue or incremental profit? What’s best for your business? We know what you’re thinking now. They’ve gone on to throw in another jargon!
Relax and read on; everything will gradually make a lot of sense. Let’s talk about incremental revenue before moving on to other aspects!
What Is Incremental Revenue?
In plain definition terms, Incremental revenue is revenue made possible when a company takes specific actions to expand or boost sales. Now, this can be done via a slew of different methods. Let’s simplify the concept with the help of an example.
Let’s say a company starts pumping money into its digital marketing campaigns. They'll surely reach more eyeballs if their marketing campaigns are on point. Now, take a scenario where the company continues to pump much money into its branding and advertising efforts. And as a result, their revenue shoots up exponentially. The exact increase in the revenue caused by their decision to invest heavily in digital marketing is knowns as incremental revenue.
To make things even clearer, let’s take another example. A footwear brand decides that it has had enough of the same old, same old. They put more money into production and came up with a new range of footwear designed especially for endurance runners.
As a result, they enter a whole new market and add a substantial amount to their quarterly revenue, which translates to over a 10% increase in revenue on a year-over-year basis. Again, the exact increase in revenue from these new shoes will be incremental revenue in this case. As we move forward with the article, do remember these examples.
What Happens When a Company Focuses on Incremental Revenue?
When a company focuses on generating incremental revenue, its standpoint is usually this. They want to watch their revenue skyrocket and expand as they delve into newer markets. And they keep reinvesting in their expansion repeatedly, and for a good reason. They get to enjoy the many benefits of generating impressive incremental revenue.
Benefits of Generating Incremental Revenue:
Happy Existing Customers, Interested New Ones
If we take up our earlier examples, a new product by a footwear brand will add variety for the existing customer. But not only that, it is also roping in a new segment of customers who are athletes and endurance runners. This new segment of customers might just be looking for a new brand intending to experiment a little.
As for the existing customers, many studies and surveys show that today’s consumer is willing to switch brands for various reasons, such as product variety, better customer service, and better deals. So, creating a new product line or amping up its digital marketing will keep a brand’s customers excited and wanting more.
Any business decision aimed at generating incremental revenue comes with this benefit. Be it a global campaign to catch eyeballs or a super-awesome product that took a heavy production budget, companies don’t think twice before investing if they find merit in such actions.
So, a company that continually strives to find ways to generate incremental keeps on expanding and reaching more and more people. In fact, in today’s global marketplace, such expansion can take a brand to the pinnacle of its niche.
Now, you must be loving the picture we have thus far painted for incremental revenue. You must think, why won’t a company want to invest heavily in its growth? After all, isn’t that what it’s all about? Topping the revenue charts and adding as many zeroes as possible? Well, there’s another way of looking at things regarding business growth.
But before we begin arguing for the other side, let us first introduce you to the other protagonist in our little thriller of business growth here. Let’s talk about incremental profit.
What Is Incremental Profit?
In purely mathematical terms, you get incremental profit when you subtract the cost involved in starting the global digital marketing campaign or producing a new endurance-running shoe (recall our previous examples) from the incremental revenue.
Again, let us simplify things a little with an example.
Let’s say a company spent $200 on a global marketing campaign (we know you can’t have a global digital marketing campaign in this amount, this is just an example). That campaign brought them a revenue of $1077. The total CPS (Cost of Product Sold) is 300, and other costs and expenses are $100. In this example, the incremental profit generated from all this effort will be $477 (Revenue minus CPS, minus marketing expenses, minus other costs and expenses).
Sticking with our other example, if it took our footwear company $1000 of marketing, design, and engineering expenses to come up with their new endurance-running shoes. At the end of the fiscal year, it resulted in incremental revenue of $800. That company is making no incremental profit. In fact, they’re at a loss of $200. But more on this later!
What Happens When a Company Focuses on Incremental Profit?
When a company wants to ensure its incremental profit stays high, it usually focuses on getting value for money. Companies that follow this growth method are keen on getting value for money. They want to make profits and abhor losses in their business.
It is more of a cautious approach to growing their business. Having said that, companies that focus on incremental profit also enjoy a range of benefits. Let’s talk about a couple of them here.
Benefits of Generating Good Incremental Profit
A Sustainable Approach to Growth
First, companies that focus on generating incremental profit want to make the most of their investments. As a result, they shy away from over-investing in their expansion efforts. When they make little to no profit, they drop that idea and find an approach that will provide a solid return on their investment.
Make no mistake; such companies want to keep their customers interested and entice new ones. It’s just that they are either unable to or unwilling to continue re-investing in their expansion efforts in the face of poor profit or even loss.
If this can be called anything, it is a lot more sustainable method of business expansion. Every penny is spent wisely, and organic methods are chosen over fabulous ones to keep the company’s growth chart rising.
Great for Small and Medium Businesses
Naturally, not all companies have the required funding to keep investing in expansion. Half a dozen quarters of substantial loss can spell doom for companies with a limited wallet.
So, if a company is only starting off, focusing on good incremental profit numbers will obviously be a better choice. As their profit numbers swell, they will eventually see the level of growth another company might see from constant investing in expansion with a focus on boosting incremental revenue.
But the question isn’t always about being able or unable to invest heavily. As we must point out, some companies might intentionally focus on incremental profit over revenue.
Now that we have closely examined our two protagonists, should we move to the final battle? But let’s not give it too much of a dramatic touch because things here won’t be as polarized as they appear now.
But which of the two can be good for your business? Will it be the approach of ensuring loads and loads of revenue at any cost? Or should it be more about staying profitable from the get-go as your brand grows using sustainable investments? Let’s try to answer this question!
Incremental Revenue vs. Incremental Profit: What’s Best for Your Business?
There are several examples of companies willing to re-invest in their growth and being willing to take losses for years on end. In fact, the e-commerce giant Amazon is the perfect example of this. Amazon spent over a decade making little to no profit, even reporting losses in the period.
You might say, if Amazon did it and is such a big company today, isn’t it the right thing to do for my company as well? Well, not really. Why? Because there will be plenty of examples on the other side, too, with companies focusing solely on generating profits.
The argument from the side of companies that follow the Amazon way might be that by generating loads of revenue, they’re setting the ground for a solid future. And Amazon did take all the losses caused by their marketing expenses and price discounts to make huge profits in the end.
But the question is, are all companies capable of that? As we said earlier, can small companies take losses quarter after quarter to scale up their revenue? But if you have the funds and willingness to pick one of these two ways? What should you choose?
When it comes to business growth and expansion, there are always a number of routes a company can take. In these two options in front of us, the right answer depends on your approach. Simply put, the answer lies in the approach you want to take.
Do you know the concept of marketing myopia? Are you confident in your vision and solution that you are willing to see losses for tomorrow’s growth now? Or do you want your company to stay profitable from the get-go and avoid taking losses at all costs?
In either of these methods, what’s best for your business is the one that makes sense for your company’s size, future plans, and more. After all, the biggest global companies like Airbnb have hardly ever been profitable. But that doesn’t mean you should blindly follow brands like them or Amazon and keep re-investing in your expansion.
The right solution for you, after all, depends on the various factors we discussed. So, whatever decision you might take must be reinforced by your own analysis, your company’s goals, and a firm decision on what matters the most to you. Staying profitable and getting value for money or taking losses today to see your revenue shoot up as you expand into newer markets?
Today’s business world is a place where there is no room for those who lack originality. Solutions that work today are the authentic ones. And what does it mean to be authentic when choosing an expansion path? It means you must strive for what will most likely work for your company.
The key, above all, is to make sure your customers stay interested in your brand and rope in new ones. You can do it by working hard to provide quality and good customer service. On the other hand, you can also do the same by giving huge discounts and taking poor profit or losses in the process.
Or, if you want to reach a global audience, you can hit the right chord with them via a slew of high-budget campaigns, or you can do it gradually, using organic methods. The goal, in either case, must be clear to you, and the path is rendered obsolete if you end up at the pinnacle of success.
On that note, we would like to take your leave and wish you all the luck with your business expansion plans. We couldn’t give you a concrete answer or pick one of the two options, but that’s how the world of business works. The path to success for any two businesses can never be the same!
Christian has over ten years of experience in marketing agencies. Currently, he has been dedicating his time to a tech startup and also writing for major publications. He loves podcasts and reading to keep up with the latest trends in marketing.