What is Marginal Revenue?

Marginal revenue (MR) is the extra revenue that a business makes from selling an extra unit of goods or services. It describes how the total revenue changes when there is an increase in the quantity sold by one unit.

Marginal revenue shows businesses how an increase in sales will impact their revenue. Marginal revenue can be very helpful when determining if it will be financially beneficial to produce and sell extra units.

For instance, if a business makes $10,000 from selling 500 units but makes $10,180 from selling 501 units, the marginal revenue on the extra unit will be $180.

What is the Marginal Revenue Formula?

The basic formula for calculating Marginal Revenue is:

Marginal Revenue = Change in Total Revenue ÷ Change in Quantity Sold 

It can also be calculated as:

MR = ΔTR ÷ ΔQ

Where:

• MR = Marginal Revenue
• ΔTR = Change in total revenue
• ΔQ = Change in quantity sold

When the quantity sold increases by exactly one unit, marginal revenue is simply the additional revenue generated by that unit.

Here is a practical example:

Let us assume that a firm earns revenues of $20,000 through the sale of 1,000 units of output. After raising output to 1,100 units, the firm’s total revenues increase to $21,500.

Marginal Revenue = ($21,500 – $20,000) ÷ (1,100 – 1,000)

Therefore, the business generates an average additional $15 in revenue for each of the 100 additional units sold. 

The Importance of Marginal Revenue for Business

• Pricing policy. If reducing prices in order to increase the number of units sold leads to the situation when marginal revenue becomes negative, this means that the price reduction has gone too far.
• Manufacturing and capacity planning. The comparison of marginal revenue and marginal cost gives the company the point of maximum production – not “as many as possible,” but the point where these two curves intersect.
• Discounting and promotion. Marginal revenue analysis allows understanding whether the price reduction in order to increase sales really increases total revenues or just redistributes them through lowering the price.
• SaaS Pricing Models. When pricing is done using a usage- or tiered approach, then the marginal revenue on each additional user/unit determines the boundaries of the price reduction.

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