Calculating Marginal Revenue: A Complete Guide

Every business decision — whether it's setting prices or forecasting sales — comes down to one key question: How much more sales revenue will this bring in? That’s where marginal revenue comes into play.

Marginal revenue isn’t just another accounting term. It’s a key driver of pricing strategies and overall revenue management. Knowing how to calculate it can sharpen your competitive edge as you refine your revenue model. Revenue management software can help you track sales data and adjust revenue strategies accordingly.

Marginal revenue is the amount of extra income generated by selling one more unit of a product or service. It’s a key indicator of how pricing and demand interact since it shows how changes in price affect sales volume. This insight can help you determine the most profitable sales strategy.

Of course, marginal revenue isn’t static. It changes based on factors such as market conditions, competition, and current pricing strategies. In monopolies or markets with pricing power, it declines as sales increase. You can use marginal analysis to decide whether producing and selling another unit is worth the cost.

Marginal revenue is the extra income from selling one more unit, while marginal cost is the expense of producing it. The key difference? If marginal revenue is higher than marginal cost, selling more is profitable.

The sweet spot is when marginal revenue equals marginal cost. This is where you maximise profit since producing more would cut into margins, while producing less would mean leaving money on the table. Understanding the relationship between the two helps you refine your pricing strategies and manage operating income.

To find marginal cost, divide the change in total cost by the change in number of units produced.

Every sale contributes to total revenue, but not every sale has the same impact. Total revenue is the total income from all sales within a specific timeframe, while marginal revenue shows how much extra income comes from selling one more unit. Tracking both can help you optimise pricing and get the highest total revenue possible.

At first, marginal revenue boosts total revenue with each additional unit sold. But at a certain point (especially in markets where pricing must drop to drive demand), marginal revenue starts to decline. If it turns negative, total revenue actually shrinks with each additional unit sold.

A business that understands how marginal revenue shapes total revenue can fine-tune its pricing and optimise production to find the highest profitability. But market conditions also play a big role — especially when comparing competitive industries and monopolistic markets.

You can find the total revenue by multiplying the selling price of each product by the number of units sold.

Maximising your revenue isn’t just about selling more — it’s about increasing profitability with intentional pricing and production strategies. Marginal revenue is a key metric that helps you make informed decisions about pricing, production, and profitability. It impacts how you operate by:

• Optimising pricing strategies: Knowing how much additional revenue each sale brings in helps determine the right price point. According to the law of demand, raising prices too high leads to a decrease in demand, while lowering them too much can shrink profit margins. Marginal analysis keeps pricing balanced.
• Improving sales forecasting: Marginal revenue trends reveal when sales are accelerating, plateauing, or declining. By identifying these shifts early, you can adjust inventory and distribution to meet demand more effectively.
• Maximising profitability: Comparing marginal revenue to marginal cost helps determine the most profitable level of production. If marginal cost is higher than marginal revenue, producing more will lead to losses instead of gains.
• Supporting revenue growth strategies: From recurring revenue models to contract lifecycle management, understanding marginal revenue helps you scale strategically without cutting into long-term profitability.

As you track and leverage marginal revenue, you can fine-tune your sales strategy and make data-driven decisions such as adjusting pricing based on demand elasticity.

Crunching numbers might not be the most exciting part of running a business, but when it comes to marginal revenue, it’s essential. The good news? The formula is simple.

Marginal revenue formula

In this formula, change in total revenue refers to the difference in revenue after selling additional items. Marginal revenue is typically measured over a specific period, such as a month or quarter, to track how each additional sale impacts total earnings.

Since marginal revenue fluctuates based on demand, competition, and market conditions, you can use this calculation to assess whether selling more at a lower price is beneficial — or if raising prices would be the smarter move.

Step-by-Step Guide

1. Determine total revenue before and after selling additional units. In the case of services, you will look at the total revenue before and after acquiring additional contracts.
2. Calculate the change in total revenue by comparing sales data before and after selling additional units or acquiring new customers.
3. Find the difference in quantity sold.
4. Apply the marginal revenue formula to calculate marginal revenue.

This straightforward approach can help you maximise revenue per unit sold rather than fruitlessly increasing sales.

The formula for marginal revenue curve is a bit more complicated, but can provide a clear visual.

Marginal revenue curve is a downward-sloping line on a graph that shows how the extra revenue from each sale changes as quantity increases. This decline in slope happens for several reasons.

Competitive pricing pressures often require you to lower prices to attract more buyers, which reduces the revenue gained per sale. Diminishing demand can also play a role since selling more may require offering discounts or promotions that cut into your revenue.

If you operate in a monopolistic market, the decline in marginal revenue can be even steeper due to monopoly pricing effects. While monopolies have control over pricing, they still face demand constraints. Unlike businesses in competitive markets that sell at a fixed price, monopolies must lower prices on all units to sell more. That means the additional revenue from each new sale declines at a faster rate.

The marginal revenue curve is a key tool for sales strategy and revenue operations because it helps you determine the ideal pricing and production levels. If your marginal revenue falls below marginal cost, producing more may no longer be profitable.

While the marginal revenue curve tracks how additional sales impact revenue, the average revenue curve shows the revenue earned per unit at different sales levels.

In markets with many sellers offering identical products — known as perfect competition — the average revenue curve is a straight line because each unit sells at the market price with no pricing power. In monopolistic markets, the average revenue curve slopes downward, reflecting the need to lower prices to drive higher sales volumes.

Since average revenue is simply total revenue divided by quantity sold, it often aligns with your pricing strategy. The formula for this curve is:

You can use this curve to understand revenue trends and adjust sales planning and pricing models accordingly.

Tracking both marginal revenue and average revenue helps you fine-tune your approach. It is an effective way to make sure that pricing and sales strategies maximise operating income and net profit without sacrificing long-term growth.

Numbers tell the real story when it comes to marginal revenue. Let’s break down a simple example to see how you can use this metric to make strategic decisions.

A retail company sells wireless headphones for $50 each. Last month, they sold 1,000 units, generating $50,000 in total revenue. This month, they launch a limited-time discount, lowering the price to $48. As a result, sales increase to 1,100 units, bringing total revenue to $52,800.

Step-by-Step Marginal Revenue Calculation

1. Find the change in total revenue ($52,800 - $50,000 = $2,800)
2. Find the change in quantity sold (1,100 - 1,000 = 100)
3. Apply the marginal revenue formula ($2,800 ÷ 100 = $28)

The marginal revenue per additional unit sold is $28, meaning the company earns an extra $28 for each pair of headphones sold beyond the first 1,000.

By tracking marginal revenue, the company can determine whether the price cut is sustainable. If the marginal cost of producing each additional unit is higher than $28, they might be losing money despite selling more.

Applying these concepts strategically can improve profitability and revenue management, ensuring you don’t just grow sales, but grow them profitably.

Marginal revenue insights can inform pricing, forecasting, and revenue management strategies — all so you can gain the most revenue possible from each additional sale. With these strategies, you can optimise how each unit or contract sold contributes to overall profitability.

• Refine your pricing strategy for maximum revenue per sale
  • Experiment with pricing to adjust prices based on demand and competition.
  • Use marginal analysis to find the sweet spot where marginal revenue exceeds marginal cost.
  • Test bundling and upselling to increase revenue per transaction.
• Optimise sales forecasting to capture more revenue
  • Use predictive sales forecasting tools to anticipate demand shifts and adjust production.
  • Use AI sales agents to identify high-value leads and increase conversion rates.
• Improve revenue operations
  • Streamline contract lifecycle management to close deals faster and reduce revenue delays.
  • Invest in revenue management software to automate pricing adjustments and improve efficiency.
• Enhance customer lifetime value to improve long-term marginal revenue
  • Shift from one-time sales to recurring revenue models through subscriptions or loyalty programs.
  • Focus on sales prospecting techniques that attract long-term, high-value customers.
  • Use AI for sales to personalise offers and improve retention rates.
• Incorporate sales technology to increase revenue growth
  • Automate pricing and quote generation with CPQ solutions to accelerate deal closure.
  • Implement AI-driven sales analytics software to uncover new revenue opportunities.

Tracking marginal revenue alongside sales forecasting and revenue operations helps you make informed decisions. And with the right technology, optimising revenue becomes even easier. Marginal revenue can provide guidance as you hone your revenue management strategy so that you get the most out of each sale.