Marginal Revenue Explained: Definition, Formula & Business Examples
Table of Contents
- What Is Marginal Revenue?
- How Marginal Revenue Works
- How to Calculate Marginal Revenue
- Marginal Revenue vs. Marginal Cost
- Marginal Revenue Curves and Graphs
- Practical Applications of Marginal Revenue
- Tips for Improving Marginal Revenue
- Common Challenges in Marginal Revenue Analysis
- Marginal Revenue for Business and Accounting
- Ready to Improve Your Pricing and Profitability?
- FAQs
Marginal revenue is the additional income a business earns from selling one more unit of a product or service. While total revenue shows how much money your business brings in overall, marginal revenue focuses on incremental change: what actually happens to revenue when output increases slightly.
For small business owners, contractors, and service professionals, this distinction matters. Growing sales does not always mean growing profit. Marginal revenue helps you understand when selling more makes sense and when it quietly hurts your bottom line.
Before we get into the details: understanding marginal revenue is most useful when you can quickly compare revenue changes to profit. Using a profit margin calculator helps you see whether the extra revenue from selling one more unit is actually improving profitability.
Get Started with Invoice Fly’s Software
Invoice Fly is a smart, fast, and easy-to-use invoicing software designed for freelancers, contractors, and small business owners. Create and send invoices, track payments, and manage your business — all in one place.
What Is Marginal Revenue?
Marginal revenue is the extra income earned from selling one additional unit of output. In economics, the marginal revenue definition focuses on how total revenue changes as quantity sold changes.
In simple terms:
- Total revenue answers: “How much did we make?”
- Marginal revenue answers: “How much more did we make by selling one more unit?”
This concept applies across industries. Whether you sell lawn care services, HVAC repairs, retail products, or construction projects, marginal revenue shows the financial value of the next sale and not just the average.
Businesses use marginal revenue to identify optimal pricing and output levels that maximize profit rather than just sales volume.
How Marginal Revenue Works
Marginal revenue depends on how pricing changes as sales volume increases. This is where many businesses get tripped up.
Revenue and Marginal Revenue
If the price of a product or service stays the same regardless of how many units you sell, marginal revenue equals the price. For example, if you charge $100 per service and sell one more service at the same price, marginal revenue is $100.
However, if you lower prices to sell more units (through discounts, promotions, or bundled pricing, for example) marginal revenue begins to fall. That’s because earlier units are now sold at a lower price as well.
This is why understanding margin vs. markup is so important. A pricing strategy that looks good on the surface may actually reduce marginal revenue and overall profit.
Market Structure and Marginal Revenue
Market conditions heavily influence marginal revenue:
- Perfect competition: Businesses are price takers. Each additional unit sells at the same market price, so marginal revenue equals price.
- Imperfect competition: Businesses must lower prices to sell more units. Marginal revenue declines as output increases.
This is why marginal revenue curves slope downward in monopolistic or monopolistic competition markets.
How to Calculate Marginal Revenue
Knowing how to calculate marginal revenue is essential for pricing, production, and growth decisions.
Marginal Revenue Formula
The standard marginal revenue formula is:
Marginal Revenue = Change in Total Revenue ÷ Change in Quantity Sold
This marginal revenue equation isolates the financial impact of selling additional units.
Step-by-Step Marginal Revenue Calculation
- Record total revenue before the change
- Record total revenue after additional units are sold
- Subtract the original revenue from the new revenue
- Divide by the number of additional units sold
Example: How to Compute Marginal Revenue
If your business sells 30 units for $3,000 and then sells 31 units for $3,150:
- Change in revenue = $150
- Change in quantity = 1
Marginal revenue = $150
To determine whether that extra $150 improves profitability, compare it to costs using a profit margin calculator or review your income statement.
Marginal Revenue vs. Marginal Cost
Understanding marginal revenue vs. marginal cost is one of the most important principles in business economics.
- Marginal revenue (MR): Extra income from selling one more unit
- Marginal cost (MC): Extra cost of producing one more unit
Profit is maximized when MR = MC.
If MR is greater than MC, producing more increases profit.
If MR is less than MC, producing more reduces profit.
The U.S. Department of Justice explains that businesses should only increase production or sales when each additional unit brings in more money than it costs to produce, reinforcing why marginal revenue and marginal cost must be analyzed together.
Marginal Revenue vs. Total Revenue
A business can increase total revenue while marginal revenue falls. This often happens when discounts are used to drive volume while overhead costs and labor remain high.
Marginal Revenue Curves and Graphs
A marginal revenue curve visually shows changes as output increases.
Key characteristics:
- Flat marginal revenue curve in competitive markets
- Downward-sloping curve in imperfect markets
- Marginal revenue lies below the average revenue curve
Businesses often pair marginal revenue curves with profitability ratios to evaluate whether growth is improving overall financial health.
Practical Applications of Marginal Revenue
Marginal revenue plays a direct role in everyday business decisions, including:
- Setting service prices and product pricing
- Deciding whether to accept discounted work
- Determining whether to expand production or services
- Evaluating marginal revenue product when hiring employees
For contractors and service businesses, marginal revenue directly affects job pricing. Resources like how to price concrete jobs, HVAC pricing made simple, and how to price landscaping jobs show how revenue and costs interact in real-world pricing scenarios.
Tips for Improving Marginal Revenue
Improving marginal revenue doesn’t always mean selling more, it often means selling smarter.
Effective strategies include:
- Reviewing cost of goods sold regularly
- Reducing unnecessary discounts
- Optimizing pricing with a service price calculator
- Focusing on higher-margin offerings
- Investing in market research
Common Challenges in Marginal Revenue Analysis
Businesses often struggle with marginal revenue analysis because of:
- Confusing marginal revenue with average revenue
- Ignoring depreciation and overhead
- Poor transaction tracking
- Incomplete or inconsistent financial records
Maintaining a clean chart of accounts and reviewing transactions regularly helps eliminate these issues.
Marginal Revenue for Business and Accounting
Marginal revenue does not appear directly on financial statements, but it supports critical accounting decisions such as:
- Budgeting and forecasting
- Pricing strategy evaluation
- Contribution margin analysis
- Long-term planning
It pairs well with financial projections and structured planning through a business plan.
Ready to Improve Your Pricing and Profitability?
Marginal revenue helps you understand when growth adds value and when it quietly erodes profit. With the right tools, it becomes practical and actionable.
Invoice Fly’s invoicing software, estimates app, and free estimate generator help you track revenue by job or service so you can confidently analyze marginal revenue and price smarter.
Get Started with Invoice Fly’s Software
Invoice Fly is a smart, fast, and easy-to-use invoicing software designed for freelancers, contractors, and small business owners. Create and send invoices, track payments, and manage your business — all in one place.
FAQs
Profit increases when marginal revenue (MR) exceeds marginal cost (MC).
This means that each additional unit sold brings in more money than it costs to produce or deliver.
To evaluate profit using marginal revenue:
- Calculate the marginal revenue from selling one more unit.
- Calculate the marginal cost of producing that unit (labor, materials, transaction fees, fuel, etc.).
- Compare the two.
- If MR > MC, profit increases.
- If MR = MC, profit is maximized.
- If MR < MC, selling more reduces profit.
This approach is especially useful when deciding whether to accept discounted jobs, add staff, or increase production.
No. Marginal revenue measures income only, not profit.
Marginal revenue shows how much additional revenue a business earns from one more unit sold. Profit, on the other hand, accounts for all costs, including: cost of goods sold, labor, overhead, marketing, administrative expenses.
A sale can have positive marginal revenue but still reduce profit if the marginal cost is higher than the marginal revenue.
No. Marginal revenue and average revenue measure different things. Average revenue is total revenue divided by the total number of units sold. It tells you what you earn on average per unit. Marginal revenue measures the change in total revenue from selling one additional unit.
Suppose a service business earns $2,400 from 20 jobs and $2,520 from 21 jobs.
Change in total revenue = $2,520 − $2,400 = $120
Change in quantity = 1 job
The marginal revenue of the 21st job is $120. This number helps determine whether accepting that extra job improves profitability once costs are considered.
When average revenue falls often due to price reductions or discounts: marginal revenue usually falls faster.
This happens because:
- Lower prices apply not only to new units but often to previous units as well.
- Each additional unit contributes less incremental revenue.
- Costs may stay the same or even increase.
As a result, businesses may see higher sales volume but lower profitability. This is why marginal revenue analysis is critical before lowering prices to increase demand.