What it means
For a small supplier in a competitive market, marginal revenue is simply the market price, because selling one more unit does not move that price. Most real businesses are not in that position: to sell more they cut prices, offer volume discounts or move into less enthusiastic parts of the market.
Once a price cut applies to all units rather than just the extra ones, marginal revenue drops sharply below the headline price. The gain from selling additional units is offset by the revenue given away on units that would have sold anyway, and this is the single most common blind spot in volume-chasing pricing decisions.
Marginal revenue is what you compare against marginal cost. Expanding output raises profit while marginal revenue is above marginal cost, and the profit-maximising volume sits exactly where the two are equal.
A key nuance is segmentation. If a company can discount to a new group without touching the price paid by existing customers, for instance through a different channel, region or product version, marginal revenue stays much closer to the discounted price and volume expansion is far more attractive.
Marginal revenue also explains why quantity-based promotions often disappoint. A blanket 10% discount to lift volume by 5% almost always reduces total revenue, and the arithmetic makes this obvious long before the sales data does.
In practice
Real-world examples
Example 1
A boutique hotel drops its midweek rate from $180 to $160 and fills six extra rooms out of 50. The rate cut costs $880 on the rooms that would have sold anyway, so the marginal revenue on the six extra rooms is well below the $160 headline.
Example 2
A software company adds a lower-priced tier for small businesses rather than discounting its main plan. Because existing customers keep paying full price, the marginal revenue on new sign-ups is close to the new tier's price and the move adds profit.
Example 3
A wholesaler offers a volume rebate that applies only to units above 5,000 per quarter. Marginal revenue on the incremental units is the rebated price, while the first 5,000 units still earn full price, which protects the overall revenue line.
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.
A fictional toolmaker currently sells 1,000 units a month at $50, giving total revenue of 1,000 x $50 = $50,000. Market research suggests dropping the price to $48 would lift volume to 1,100 units, producing revenue of 1,100 x $48 = $52,800.
Marginal revenue for those extra 100 units is ($52,800 - $50,000) / 100 = $2,800 / 100 = $28 per unit, far below the $48 price. The reason is visible in the two effects: the extra 100 units bring in 100 x $48 = $4,800, while the $2 price cut on the original 1,000 units gives away $2,000, netting $2,800.
Now compare that with a marginal cost of $30 a unit. Marginal revenue of $28 is below marginal cost, so the expansion destroys value: profit falls from 1,000 x ($50 - $30) = $20,000 to 1,100 x ($48 - $30) = $19,800, a decline of $200 despite the higher sales.Case study
Seen in the real world
Calderbrook Ceramics is an illustrative, fictional homeware brand selling 8,000 mugs a quarter at $24 each, generating $192,000 of revenue against a marginal cost of $9 a mug. A new commercial director proposed a 15% price cut to $20.40 to grow volume.
The marketing team estimated volume would rise 25% to 10,000 mugs, producing revenue of 10,000 x $20.40 = $204,000. Marginal revenue on the 2,000 extra mugs was ($204,000 - $192,000) / 2,000 = $6 per mug, less than the $9 marginal cost, so contribution fell from 8,000 x ($24 - $9) = $120,000 to 10,000 x ($20.40 - $9) = $114,000.
Calderbrook instead launched a plainer second line at $17 through a different retail channel, leaving the original price untouched. Volume on the new line reached 2,400 units at a marginal cost of $8, adding $21,600 of contribution, and this illustrative example shows why segmenting a discount usually beats spreading one.
Watch out
Common mistakes
- Assuming marginal revenue equals the selling price. That only holds when extra volume can be sold without reducing the price charged to existing customers.
- Judging a price cut on volume growth alone. The revenue given away on units that would have sold anyway usually outweighs the gain from the extra units.
- Ignoring marginal cost when evaluating a volume push. Extra revenue is only worth having if it exceeds the cost of producing the extra units.
Questions
People also ask
Why can marginal revenue be negative?
If a price cut is deep enough, the revenue lost on existing volume exceeds the revenue gained from the additional units, so total revenue actually falls.
How does marginal revenue relate to profit maximisation?
Profit is highest at the output level where marginal revenue equals marginal cost, and producing beyond that point reduces profit.
Can a business keep marginal revenue close to its price?
Yes, by segmenting the discount through a separate channel, product version or customer group so existing full-price sales are unaffected.