The Incremental Approach requires information on incremental revenue, incremental costs, cannibalization effects, market expansion potential, and the resulting incremental profitability to assess the profit impact of adding a new product with similarities to an existing one.
The Incremental Approach is a method used to assess the profit impact of adding a new product that shares similarities with an existing product. In this approach, the focus is on the incremental or additional revenue, costs, and profits associated specifically with the introduction of the new product.
Key information needed for the Incremental Approach includes:
Incremental Revenue:
Understanding the additional revenue generated by the new product is crucial. This involves estimating the sales volume, pricing strategy, and any complementary effects on existing product sales.
Incremental Costs:
Identifying the direct costs associated with the new product is essential. This includes costs related to production, marketing, distribution, and any additional expenses specific to the new product.
Cannibalization Effects:
Assessing whether the introduction of the new product will cannibalize sales of the existing product among shared customers. Understanding the extent of cannibalization helps in predicting the net impact on overall sales.
Market Expansion Potential:
Evaluating the potential for market expansion or reaching new customer segments due to the introduction of the new product. This can contribute positively to incremental revenue.
Incremental Profitability:
Calculating the incremental profit by subtracting the incremental costs from the incremental revenue. This provides a clear picture of the net financial impact of introducing the new product.
By considering these factors, the Incremental Approach enables businesses to make informed decisions about the profitability and feasibility of introducing a new product with similarities to an existing one.