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

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.