Marginal Revenue (MR) is the additional income a business earns from selling one more unit of a product or service. It helps businesses decide whether increasing production is profitable. The formula for marginal revenue is shown below:
Marginal Revenue = Change in revenue / Change in quantity
Marginal revenue equals the change in revenue divided by the change in quantity demanded.
To better understand the concept, imagine you run a small online store selling wireless earbuds. On a regular day, you sell 50 pairs at $40 each, bringing in a total revenue of $2,000. To boost sales, you slightly lower the price to $39 for everyone and manage to sell one extra pair, increasing total sales to 51 units. Now your total revenue becomes $1,989 (51 × $39). When you compare the two, you realize that selling one additional pair actually reduced your total revenue by $11. That $11 drop is your marginal revenue for the 51st unit. In other words, even though you sold more, the price cut across all units cost you more than the extra sale earned. It is showing how marginal revenue can sometimes be negative.
In economics, total revenue and marginal revenue are distinct concepts. Since total revenue tells you how much you earned overall, while marginal revenue tells you whether selling one more unit is worth it, these two terms are quite different from each other.
Importance of Marginal Revenue
Marginal revenue is important because it guides smarter pricing and production decisions. It helps businesses understand whether selling one more unit will actually increase revenue or reduce it. Especially when price changes are involved. By comparing marginal revenue with marginal cost, companies can identify the profit-maximizing output level and avoid selling more than what is financially beneficial.
For example, an online retailer may notice that lowering prices slightly increases order volume, but the extra sales don’t fully offset the revenue lost from the price drop. Marginal revenue reveals this critical point. It signals when selling more stops being profitable and helps the business adjust its pricing strategy to the most optimal version.
Why Marginal Revenue Matters
- Profit Maximization: Businesses watch it closely to know when to stop producing more. Since profit is maximized at the point where marginal revenue equals marginal cost, going beyond that means each extra unit costs more than it brings in.
- Pricing Decisions: At the same time, marginal revenue helps explain pricing decisions. It shows how selling more often requires lowering prices and how that trade-off impacts overall revenue.
Marginal Revenue in Ecommerce
Dynamic Pricing
Every price change affects marginal revenue!
When you lower or boost prices to match competitors, or increase conversion rates, marginal revenue shows whether the extra volume compensates for the lower/higher price. This is exactly where dynamic pricing comes into play. What can be smart is adjusting prices only when the additional sales are expected to generate positive marginal revenue. Not just more orders. Sometimes, selling more doesn’t always lead to higher profits; being dynamic and adaptable during unpredictable times with a solid strategy helps businesses succeed.
Inventory Management
Marginal revenue helps decide when to sell fast and when to slow down.
In ecommerce, if your inventory holding costs are high, it may make sense to accept lower marginal revenue or even break even. However, when inventory is limited or demand is strong, it is usually wiser to protect your marginal revenue by keeping prices higher, especially during peak times.
Promotions & Discounts
Not all discounts are equal.
Marginal revenue indicates whether a campaign is generating profitable growth or merely advancing demand at a cost. Selling more doesn’t necessarily mean to earning more, and marginal revenue makes this distinction clear.
Wrap Up
In conclusion, marginal revenue shows what really happens to revenue when sales increase by one unit. It moves the focus beyond total sales and highlights the trade-off between price, volume, and profitability. By understanding marginal revenue, businesses can make more informed pricing, production, and inventory decisions, ensuring that growth adds value to their business.
