What is Marginal Revenue? A Guide to Calculation and Business Impact in 2025

In this article, we’ll tell you everything you need to know about marginal revenue, how to calculate it, and how you can apply it.

Marginal revenue forms an important component of microeconomics. By analyzing marginal revenue, a business can identify the revenue generated based on every individual sale. This calculation is critical in maximizing profit potential. Without further ado, let’s dive in!

Marginal Revenue Definition

Before diving into how to calculate marginal revenue, let’s first understand what it really is and why it’s a game-changer for your business.

Marginal revenue is the incremental change in earnings resulting from the sale of one additional unit.

In simpler terms, marginal revenue refers to the extra revenue a company makes from each additional sale, after considering any associated costs. Let’s break it down with an example:

• Lower price, more sales: If you lower the price of your product, you’ll likely sell more—sounds great, right?
• Higher price, fewer units: But if you raise the price, you might sell fewer units, yet you’ll make more profit per sale.

Now, the key question: Does the extra profit from each higher-priced item make up for the lost revenue from fewer sales?

In theory, markets work perfectly, where price and quantity wouldn’t influence each other, and marginal revenue would always match the sale price. But in the real world, monopolies and imperfect competition often disrupt this balance. That’s where understanding and calculating marginal revenue becomes critical for businesses navigating these complexities.

Do the math. Revenue does not necessarily equate to profit.

—Francesca Anastasi

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Understanding Marginal Revenue in Business

Marginal revenue applies to businesses of all sizes, from giant retailers like Walmart to small, local shops. Let’s dive into a smaller business example to really grasp how it works:

Imagine you own an artisanal candle business. Naturally, your goal is to maximize profits. To do this, you need to:

• Calculate your expenses per unit and determine the ideal price point that maximizes your profit.

👉 You have two options:

1. Set a high price for each candle, benefiting from higher profits per unit.
2. Make more candles and sell them at a lower price to boost sales volume, but this will likely lower your revenue per candle.

The trick is to find the right balance between price and volume.

Now, let’s break it down with some numbers.

👉 In Q1, you make 10 candles and sell 5 for $50 each. Your total revenue is $250.

In Q2, you decide to make 10 more candles to increase your revenue. But, based on your Q1 sales, you’ll likely sell 5 of those candles at the same $50 price, leaving you with 10 unsold candles. These candles will cost you storage space but won’t contribute to additional revenue.

👉 Should you lower your price to $45 per candle to sell more?
No, lowering the price might not help. Here’s why:

If you sell 6 candles at $45 each, you’ll make $270 in total. That’s only $20 more than in Q1. The key takeaway: this is your marginal revenue—the extra revenue you make from selling that one additional candle.

This example highlights a critical concept: sometimes less equals more. By lowering your price, you risk reducing revenue per candle, which may not necessarily increase your overall profit.

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Simple Steps to Calculate Marginal Revenue

Calculating marginal revenue is pretty straightforward. It’s simply the change in total revenue divided by the change in the quantity sold. Here’s the formula:

Marginal revenue = change in total revenue ÷ change in quantity sold

Now, how do we apply this formula? Let’s go back to the artisanal candle business example. Ideally, you want to sell more than just one extra candle in Q2. Let’s say your goal is to sell 15 candles.

If you lower the price of your candles to $35 each and manage to sell 8 candles (3 more than in Q1), here’s what happens:

• Your total revenue would be $280 ($35 x 8 candles).
• Your increase in revenue is $30 (compared to Q1’s $250 in revenue).

To calculate the marginal revenue, divide that $30 increase by the 3 additional candles sold. This gives you a marginal revenue of $10 per candle.

So, in this example, by lowering the price by $15 per candle and selling 3 more candles than before, you’ve earned an additional $30 in revenue, which results in $10 in marginal revenue per candle.

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Using Marginal Revenue To Determine Success

Now, you need to ask yourself if the effort you put into making each candle was truly worth it, especially if your marginal revenue is just $10 per unit. Let’s break it down further:

👉 First, remember that you sold five candles for $50 each in Q1. Let’s say you wanted to sell 15 candles no matter what, so you dropped the price to just $15 per candle and sold them all.

👉 This would mean you made $225, but your marginal revenue is now a negative $2.50 per candle.

To calculate this, simply divide the $25 decrease in revenue by the 10 extra candles you sold.

❌ Here’s the problem: You’re doing all this work, but you’re losing money. You’re effectively paying customers $2.50 per candle just to get them to buy. That’s a $2.50 loss per unit simply because you added more stock to your inventory!

Calculating marginal revenue may seem tricky at first, but with a simple formula, it’s easy to figure out. And knowing your marginal revenue is key to making smart decisions for your business.

Many businesses use this calculation to decide whether or not to increase production and by how much. Eventually, a business reaches profit maximization, where marginal cost equals marginal revenue.

At that point, it’s best to halt production. Adding more units will make marginal revenue fall below marginal cost, resulting in a net loss. Essentially, producing more will cost more than what you earn from selling it, so it’s no longer worth it.

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Understanding Total Revenue

It’s important to consider your marginal revenue and total revenue combined to garner a clearer understanding of how well your business is performing. 

Total revenue measures your business’ total sales or income for a specified number of items or services. 

In other words, it refers to the total amount of money customers have paid for a provided set of goods or services. It’s the money in the till before any costs are deducted. The calculation for total revenue looks like this:

Total Revenue = Price X Quantity 

What’s the difference between marginal and total revenues? A business’ total revenue measures the number of direct sales, whereas the marginal revenue measures the relationship between a change in sales and a change in quantity. For example:

👉 If you sell 50 of your artisanal candles at $10 each, your total revenue will equal $500—you’re simply multiplying the price of the candles by the quantity sold. 

👉 When looking at marginal revenue, on the other hand, imagine you sold 55 candles at $9.99 each. Your total revenue would equal $549.45. The marginal revenue would then equate to $9.89.

Based on the formulas, your marginal revenue will generally be less than your total revenue. If these numbers start to look too similar, you need to bring about a more profitable balance. This may mean reassessing your markup calculations, reducing the number of units you produce or halting production altogether. 

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The Bottom Line

A major part of running a business is truly understanding the numbers that come along with it, and not just relying on estimates.  Once you understand the numbers and their formulas, you can use them to make informed decisions that give you the best chance of boosting your profits.

To track every working minute and make your payroll as accurate as possible, use the best time tracking software. If you are managing a team of 5 or more and looking to boost efficiency, Everhour is the perfect tool to keep your team on track.

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