What is Differential Revenue?

Differential revenue is the difference in sales that will be generated by two different courses of action. The concept is commonly used when evaluating which of two (or more) investments to make in a business. Thus, it is the additional or incremental revenue that a business would earn by selecting one course of action compared to another.

Example of Differential Revenue

As an example of differential revenue, a manager is pondering whether to invest in a new product line that will generate $1,000,000 of new sales, or increase the marketing for an existing product line, which will increase its sales by $700,000. The differential revenue between the two alternatives is $300,000.

Disadvantages of Differential Revenue

The fallacy in using the differential revenue concept is that it pays no attention to the differential profit or cash flows generated by the various decisions. Profits or cash flows are vastly more important than revenue, since they contribute to the financial health of a business.