Companies spend a lot to market their products and services. And spending blindly on marketing activities may not bring revenues. An intelligent approach is to quantify the returns on marketing campaigns to measure their effectiveness.
Incremental sales are what show the effectiveness of your marketing campaigns. Against any marketing campaign, you surely notice a change in sales which acts as a benchmark to measure its success.
So, Incremental sales are basically one of the key performance indicators for your business. If you want to learn in detail what incremental sales are? How to calculate them? And how could incremental sales help you restructure and optimize your marketing campaigns?
Incremental sales definition
Incremental sales refer to the difference between actual sales a business makes during a specific marketing campaign and what it would have made without that specific marketing activity. This way, incremental sales quantify the success of the marketing efforts.
Companies spend a major chunk of their revenues on sales and marketing. The sales and marketing expenses as a percentage of revenue for some companies go up to 50%. Incremental sale is a KPI that lets you know what the marketing spend brings to you and how to optimize marketing costs.
Usually, we measure incremental sales over a reported period that entails all marketing and sales activities. However, you can also do incrementality testing for a single marketing campaign, say a social media marketing campaign.
How to calculate incremental sales
To calculate incremental sales, you first need to define the reported period in which you do your marketing activities whose effectiveness you want to measure.
The incremental sales formula is
Incremental Sales = Total Sales - Baseline Sales
So, the things you need to know for incremental sales calculation are total sales and baseline sales. Accounting for total sales is an easy and straightforward task. But calculating baseline sales is tricky, requiring you to analyze your historical accounting data deeply. But what exactly are baseline sales?
Baseline sales are the sales your business will make without the influence of any marketing campaign. You need to analyze your historical numbers and predict baseline sales keeping in mind the sales growth projection and seasonality factors.
Incremental sales example
Let’s see an example. Company A made sales of $2000, $3000, and $4500 in 2018, 2019, and 2020, respectively. This was when company A had deployed its usual marketing strategies.
If you analyze Company A’s numbers, you may note that there has been a steady year-over-year growth of 50%. So, we can predict the baseline sales will be $6750 in 2021 as there will be 50% year-over-year growth per the historical trends.
The example we put for you is just an example. Every business has different nature and different sizes of historical data available. Thus, you may predict your baseline sales as per your historical sales growth.
Anyway, we continue with our example of Company A. In the year 2021, the business owner decided to reach a new target audience and invested $2500 in a new campaign and made a total sales of $9000. And we estimate that the baseline sales would have been $6750 had no marketing investment been made.
Putting values in the incremental sales formula,
Incremental Sales = Total Sales - Baseline Sales
Incremental Sales = $9000 - $6750
Incremental Sales = $2250
See, the company’s market spend didn’t work well for her. Incremental sales of $2250 for an initial marketing investment of $2500 is clearly a loss.
Why you need to calculate incremental sales
Spending on marketing has been growing steadily, and the companies will spend more than $1 trillion in the year 2026. With that huge chunks engorged on by marketing teams, the businesses would want to know their efficiency.
Marketing and sales go hand in hand. Marketing brings you the customers, and sales personnel convert them. Thus, marketing props sales to bring revenues to a company. The sales team needs to collaborate with the marketing team to realize the true potential of any marketing campaign.
The incremental sales metric is a KPI of marketing effectiveness that gauges the performance of sales and marketing teams for any marketing campaign. It also helps you restructure and optimize your marketing spending and improve your sales metrics.
Measuring incremental sales lets you know your marketing investments' overall success/failure. You know whether your marketing efforts bring enough paying customers and revenues to increase incremental revenue and make your business profitable.
On top of that, with incremental sales for specific campaigns and incrementality testing, you can know the key drivers of your revenues. For example, you may conclude that social media marketing is more efficient for you than pay-per-click. Eventually, this metric (incremental sales) helps you optimize your marketing costs.
Limitations of Incremental Sales
Incremental sales don’t consider other factors that can contribute to sales volume variance. There can be many other factors that drive sales. We can just do some brainstorming.
- You hired new staff for the sales team. The new sales persons are agile and more proactive. They have increased your revenues.
- There has been a change in your products and services. Keeping in view the market trend, you updated your product. And your updated product, not the marketing campaign, contributed to sales volume variance. Pricing matters the same.
- You have a competitive advantage over your competitors. And because of your competitive advantage over your peers, some of your competitors lost their customers to you. This can contribute to sales volume variance or increased incremental sales.
- There has been an abrupt demand for your products and services. Zoom became a popular conferencing platform overnight. It’s because the demand was abrupt because of the worldwide pandemic.
Moreover, some marketing efforts may not realize in the reported year and remain largely unaccounted for. For example, you may not get leads immediately from your content marketing channels.
How to increase incremental sales
- Focus sales efforts on selling add-ons to already existing customers. This increases incremental sales.
- Building customer relations can help you increase your incremental sales. Engagement is the key!
- Know what marketing channels are best to put your money in. The incremental sales increase when you do it right at the right place. Always stay abreast of marketing trends!
Incremental sales is a KPI that measures the effectiveness of a marketing/sales promotion campaign. Incremental sales are the difference between total and baseline sales that your business would have made under the usual marketing strategy. If you accurately measure incremental sales, you can make informed decisions and direct future marketing investments accordingly.
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