Differential revenue is another name for incremental revenue: the difference in total revenue between two alternatives a business is choosing between. It is the revenue side of differential analysis, and it is always paired with differential cost, the difference in total cost between the same alternatives.
Differential revenue in decisions
Managers use differential revenue when deciding whether to accept a special order, add or drop a product line, sell a product as it is or process it further, or change a price. Only revenues that differ between the choices matter. Revenue that will be earned either way has no bearing on the decision.
Suppose a company now sells 8,000 units a month at $25, for revenue of $200,000. It could cut the price to $23 and expects to sell 10,000 units, for revenue of $230,000. The differential revenue of the price cut is $30,000. If producing the extra 2,000 units would add $22,000 in cost, the differential profit is $8,000, which favors the lower price.
Differential revenue is closely related to marginal revenue, the economist's term for the extra revenue from selling one more unit. In practice, accountants usually compare whole alternatives rather than single units, and they look at differential revenue together with relevant costs before choosing.