Selling more of a product isn’t always the answer for companies seeking higher revenue.
In reality, it’s a complicated equation—part of which accounts for how much the company is willing to discount prices and the relationship between lowered prices and increased demand.
The change in revenue from adding one more unit is called marginal revenue.
What is Marginal Revenue?
Marginal revenue is the additional revenue you earn from selling one more unit of a product or service. If you sell 100 units and then sell one more, marginal revenue shows how much extra revenue the 101st sale brings in. It’s calculated as the change in total revenue divided by the number of goods sold.
Businesses run this calculation to determine whether selling additional products is worthwhile, because an increase in revenue does not necessarily translate into higher profitability. In reality, companies have to balance per-unit production, fulfillment, support, sales, infrastructure, and discounting costs against the sale price.
Synonyms
- MR
- Additional revenue
How Marginal Revenue Works
Early on, additional sales usually generate high marginal revenue because you sell at or near list price, demand is strong, and customer acquisition is efficient.
As output increases, marginal revenue typically declines. To sell more, you lower prices, introduce discounts, expand sales efforts, and/or move into less responsive segments. Each extra unit still adds revenue, but it adds incrementally less than the previous one.
This pattern is normal in competitive markets and predictable in most pricing models.
The Law of Diminishing Marginal Returns
The law of diminishing marginal returns explains why marginal revenue falls as volume rises.
Once you’ve captured your highest-value customers, each additional sale requires more effort or greater concessions. Discounts increase, sales cycles lengthen, and conversion rates drop. The incremental revenue from each unit shrinks as a result.
This is why, on a per-unit basis, profit increases only when marginal revenue exceeds marginal cost. And at a certain point, the two equal one another. This is where profit stops growing and volume-driven expansion loses its economic advantage.
MR = MC vs. Breakeven Point
It’s easy to get confused here because the words are nearly identical.
Breakeven is where total revenue equals total cost. You’re making zero profit overall, but marginal revenue and marginal cost don’t have to match there. In fact, they probably don’t.
Marginal revenue = marginal cost is the point where profit is maximized. Up to that point, each additional unit adds profit because the extra revenue exceeds the extra cost. Beyond it, each additional unit reduces overall profit because the marginal cost is higher.
The Relationship Between Marginal Revenue and Marginal Cost
Marginal revenue and marginal cost both play an important role in determining profitability, but the two are not directly related.
The Difference Between Marginal Revenue and Marginal Cost
Marginal cost is the variable cost incurred by a business for producing and selling one additional unit of output. It’s calculated by dividing the incremental change in total cost by the change in quantity.
Marginal cost is based on the variable and fixed costs associated with the level of output. When output increases, marginal cost sometimes increases.
At some point, economies of scale kick in, and marginal cost starts to decrease.
Marginal revenue doesn’t consider costs—it’s based solely on changes in sales prices, product quantities, and total revenue.
To get a complete picture of whether or not selling an additional unit is viable, businesses need to know their marginal profit, which is calculated by subtracting marginal cost from marginal revenue.
Marginal profit can vary widely depending on the industry and context. In any case, when a business’s marginal profit is negative, it should consider cutting prices or ceasing production of that particular unit to reduce costs and increase profitability.
The Marginal Revenue Curve
The marginal revenue curve is a graphical representation of marginal revenue. It provides visual evidence of what happens to total revenue when additional units are sold at a given price.
The shape of the curve can vary depending on the type of market structure, but it is typically downward-sloping—that is, it shows that as more units are sold, MR starts to decline because the company is forced to decrease prices to keep up with demand.
For this reason, companies usually need to decrease their product price to increase their market share. The idea behind the marginal revenue curve is that at some point, the market price for a product will be so low that producing more units of it will no longer make sense from a business perspective.
Marginal Revenue Curve in Different Industries
Marginal revenue exists in every industry because every business sells additional units one at a time, even if it doesn’t think about it that way. The question isn’t whether marginal revenue applies. It’s how visible and actionable it is.
In industries with clear unit pricing (manufacturing, retail, commodities, transportation), the marginal revenue curve behaves close to the textbook version. As output increases, prices fall or discounts rise, so marginal revenue declines predictably.
In software and digital businesses, the cost of serving one more customer is low, so marginal cost stays near zero for a long time. Marginal revenue declines mainly because of pricing pressure, plan downgrades, or market saturation rather than production limits.
In services and labor-constrained industries, marginal revenue drops sharply once capacity tightens. Each additional unit requires overtime, new hires, or quality tradeoffs, which changes both marginal cost and the effective revenue you can earn.
In regulated or monopoly markets, marginal revenue stays stable for longer or is constrained by regulation rather than demand, but the logic still holds because monopolies still face demand limits and trade price for additional volume.
Why is Marginal Revenue Important?
MR is an important concept because it helps companies decide whether to increase production and sales or keep prices steady.
It’s also used for revenue optimization, informing business decisions about investing in marketing, production, new feature development, and additional sales efforts.
From the perspective of MR, there are three ways to improve the relationship between each output unit, its price, its respective revenue, and overall profitability.
- Increase prices. To increase the revenue per unit sold while maintaining sustainable growth, the demand should exceed the supply or price elasticity should be low. At the very least, a decrease in demand shouldn’t outpace the price increase.
- Reduce marginal costs. Lowering delivery or production costs per unit sold allows companies to remain competitive while still making a profit. When a company becomes more efficient, it can improve its profitability without changing its marginal revenue.
- Maximize output. Businesses can maximize total revenue generation by producing and selling the most units possible within a given time frame. Since this usually involves discounting or lowering the price altogether, it usually occurs at the expense of marginal revenue. The additional units sold must make up for the lower revenue per unit.
Organizations can reasonably determine what growth strategies are most feasible by calculating marginal revenue and applying it to the bigger-picture profitability equation.
How to Calculate Marginal Revenue
Marginal Revenue Equation
In its most basic sense, the marginal revenue equation shows that when revenue increases, the number of units sold must increase. MR is calculated as the change in total revenue (TR) divided by the change in quantity (Q).
The marginal revenue formula is as follows:
To effectively calculate MR:
- Calculate the change in total revenue (TR) by subtracting the original TR from the new TR.
- Determine the change in quantity (Q) by subtracting the original Q from the new Q.
- Divide the change in total revenue by the change in quantity to find MR.
Marginal Revenue Calculator Example
Imagine a company sells widgets for $5 each. The company sold 10 widgets for a total of $50. The company does not operate in a competitive market, and the demand for the good is inelastic (doesn’t change much with price).
The company decides to lower the sale price of a widget from $5 to $4 to see if it would increase sales metrics. To calculate MR, first, we must find the change in total revenue:
Next, calculate the change in quantity:
Finally, divide the change in total revenue by the change in quantity to determine MR:
In this example, the marginal revenue for each additional widget sold is -$2. This means that for every additional widget the company sells, it generates $2 less in revenue than before.
Since the demand doesn’t change much with changes in the selling price, it wouldn’t make sense for the company to alter its pricing strategy to incentivize more sales.
Examples of Marginal Revenue
Here are three concrete examples that show how marginal revenue behaves, plus how it affects marginal profit once you factor in marginal cost.
Example 1: Stable Marginal Revenue, Stable Marginal Profit
You sell a B2B software subscription for $1,200 per year. Each new customer pays the same price because there’s high demand and you don’t have to discount.
- Marginal revenue: $1,200
- Marginal cost: $300
- Marginal profit: +$900
Each additional customer adds the same amount of profit, so total profit grows linearly. It’s worth it to sell more subscriptions.
Example 2: Stable Marginal Revenue, Increasing Marginal Profit
You sell a physical product for $100 per unit and you’re able to keep pricing constant as volume increases. At first, your marginal cost is $80 and your marginal profit is $20, but you’re able to negotiate a better deal with your supplier for the increase in order volumes as you scale.
- Marginal revenue: $100
- Marginal cost: $50
- Marginal profit: +$50
Marginal profit increases due to economies of scale, meaning it’s especially worth it to sell more products.
Example 3: Declining Marginal Revenue Relative to Marginal Cost
You sell a service with limited team capacity, and new clients require more customization and support. While you charged $5,000 at a marginal cost of $2,000 for each of your early clients, later ones, you’d have to spend more in labor and management time to bring on one more.
- Marginal revenue: $5,000
- Marginal cost: $4,800
- Marginal profit: +$200
Revenue per sale stays the same, but marginal cost rises to the point where the marginal profit is almost zero. At that point, growth is operationally risky even though revenue continues to increase, and you should focus on restructuring before adding new clients.
People Also Ask
Is marginal revenue the same as profit?
Marginal revenue and profit are not the same. Profit describes the net gain or loss associated with a business operation, taking into account revenue and operational costs. Marginal revenue only shows the increase in total revenue that occurs when one additional unit is sold. In order to calculate additional profits from an increase in marginal revenue, businesses must also account for the marginal cost of the product, which is the cost associated with producing one additional unit.
Can marginal revenue be negative?
Marginal revenue can be negative, and it often is. When units of output sold are priced at a lower rate than the average price of all units sold, marginal revenue falls. This can occur when businesses offer discounts or other incentives to customers to increase sales.
Negative marginal revenue is not necessarily a bad thing—sometimes, it is nothing more than a factor of production and demand. As shown by the marginal revenue curve, businesses often need to lower their prices to keep up with market demand. Unless there is a proportional increase in production efficiency, the marginal revenue figure will decrease.
What is the difference between average revenue and marginal revenue?
Average revenue describes the total revenue generated from a product divided by the number of units sold. Marginal revenue describes the change in total revenue that occurs when one additional unit of that product is sold.
Average revenue typically remains steady regardless of output level, while marginal revenue changes as more units are produced and sold.
There may be times where marginal revenue is higher or lower than the average revenue, depending on sales incentives, volume discounts, and changes in production levels.
In the short run, MR may exceed average revenue (AR), indicating the company earns more per unit sold. In the long run, it will eventually equal the AR.
As prices for a product or service decline due to increased competition, customer demand for that product or service will increase, but AR will remain unchanged.