What it means
When you run a business, understanding how your total income changes with every single sale is vital. Marginal revenue focuses purely on the next sale, rather than your overall average.
If you sell ten items and then sell an eleventh, marginal revenue is the specific money brought in by that eleventh item. For businesses selling identical items at a fixed price, this figure remains equal to the selling price.
However, when companies need to lower prices to attract more buyers, marginal revenue starts to drop because the discount applies to more than just the new sale. This concept matters deeply because it helps you spot the exact point where selling more stops making financial sense.
Businesses use it alongside marginal cost, which is the expense of producing that extra unit. As long as the extra money from a sale exceeds the extra cost to make it, you should keep selling.
When the extra money drops below the cost, you should stop expanding output. Managers rely on this metric to set promotional strategies, manage discount structures, and evaluate whether volume discounts actually boost total profit.
In practice
Real-world examples.
Example
You run a bakery selling 100 loaves of bread daily at two pounds each. To sell a 101st loaf, you drop the price to one pound ninety. Your marginal revenue for that extra loaf is one pound ninety.
Example
A local gym charges fifty pounds monthly. Adding one more member brings in fifty pounds for that month. Assuming capacity is not an issue, the marginal revenue of that new sign-up is fifty pounds.
Example
A software firm sells subscriptions for twenty pounds per month. To secure a bulk corporate deal of ten extra licenses, they offer a slight discount, bringing the marginal revenue per license down to fifteen pounds.
Think of it
“Imagine baking a batch of cookies. Marginal revenue is the exact satisfaction or sweetness you get from eating just one more cookie, compared to how full you already feel.
Formula
Calculation
Marginal Revenue = Change in Total Revenue / Change in Quantity Sold. For example, if your total revenue rises from one thousand pounds to one thousand one hundred pounds when you increase sales from 100 units to 110 units, the calculation is 100 pounds divided by 10 units, giving a marginal revenue of 10 pounds per unit.Case study
Seen in the real world.
GreenLeaf Coffee, a fictional boutique cafe, wanted to test a late-afternoon happy hour to boost sluggish sales between 3 pm and 5 pm. Normally, they sold 40 coffees during this two-hour window at 3 pounds each, generating 120 pounds in total revenue. When they introduced a promotional price of 2 pounds per cup, sales increased to 70 cups sold during that same window. Total revenue rose from 120 pounds to 140 pounds. To evaluate the success, GreenLeaf calculated the marginal revenue. The change in total revenue was 20 pounds, and the change in quantity sold was 30 cups. Dividing 20 pounds by 30 cups revealed a marginal revenue of roughly 67 pence per extra cup. The cafe manager then compared this figure to the marginal cost of making a cup of coffee, which was 80 pence for ingredients, milk, and staff time. Because the marginal cost of 80 pence exceeded the marginal revenue of 67 pence, the happy hour promotion actually reduced overall profit, despite the rise in customer footfall. GreenLeaf promptly cancelled the discount.
Watch out
Common mistakes.
- Confusing marginal revenue with average revenue or total revenue.
- Assuming marginal revenue always stays equal to the selling price.
- Ignoring the cost side and focusing entirely on revenue growth.
Questions
People also ask.
Can marginal revenue ever be negative?
Yes. If you have to lower your price so much to sell extra units that your total revenue actually drops, your marginal revenue will be negative.
How does marginal revenue relate to profit maximization?
Profit is maximised at the exact point where marginal revenue equals marginal cost. Producing beyond this point reduces total profit.
Is marginal revenue relevant for service businesses?
Yes. Any business taking on extra clients, billable hours, or custom projects can use it to evaluate whether the next contract is worth the effort.
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