How to Work Out Marginal Revenue (With Formula and Example)

A manager is looking at a sales report after a busy month. Orders are up, but so are discounts, delivery costs, and the time needed to serve each new customer. The total-revenue line is moving in the right direction, yet one question remains: is the next sale actually worth pursuing? This is a common, composite scenario, not a specific reported case. Many people in this position know how to calculate total sales but need a way to measure what changes when output increases.

Marginal revenue provides that answer. It shows how much total revenue changes when a business sells additional units. By comparing revenue and quantity at two output levels, you can calculate the revenue generated, on average, by each added unit over that range.

What marginal revenue means

Marginal revenue is the change in total revenue divided by the change in quantity sold. Put simply, it asks: how much additional revenue did the business receive from selling more?

The standard formula is:

Marginal Revenue = Change in Total Revenue ÷ Change in Quantity

Or, using common abbreviations: MR = ΔTR ÷ ΔQ

Investopedia describes marginal revenue as the change in total revenue divided by the change in total output, and notes it is often shown as a downward-sloping line on a graph. Investopedia's marginal revenue guide

Marginal revenue is not the same as:

• Total revenue: all revenue from all sales
• Price: the amount charged for one unit
• Profit: revenue remaining after costs
• Marginal cost: the additional cost of producing or delivering more units

A business can increase total revenue while its marginal revenue falls. For example, a company may need to lower its price to persuade more customers to buy. It sells more units, but each additional unit adds less revenue than earlier units did.

How to work out marginal revenue step by step

You need two snapshots of business activity: total revenue at the starting quantity, total revenue at the new quantity, and the number of units sold at each point.

Step 1: Find the change in total revenue. Subtract the earlier total revenue from the later total revenue.

Step 2: Find the change in quantity. Subtract the earlier number of units sold from the later number.

Step 3: Divide the revenue change by the quantity change. The result tells you the average additional revenue per unit for that increase in sales volume.

A worked example with marginal cost

Consider an example published by McCracken Alliance. A manufacturer sells 1,000 units at $25 each, creating total revenue of $25,000. It then raises production and sells 1,200 units at $23 each, bringing total revenue to $27,600. McCracken Alliance's example

Measure	Starting point	New point	Change
Units sold	1,000	1,200	200
Total revenue	$25,000	$27,600	$2,600

MR = $2,600 ÷ 200 = $13 per unit

Although each of the additional units sold at a listed price of $23, marginal revenue over this range was $13 per added unit, because the lower price affects the whole revenue picture, not just the newest sales.

The formula only tells half the decision. Suppose producing and shipping those extra 200 units required $500 more in materials and $700 more in packing and delivery labor, a marginal cost of $1,200, or $6 per unit. Comparing the two:

Measure	Value per added unit
Marginal revenue	$13
Marginal cost	$6
Result	MR exceeds MC by $7 per unit

Because marginal revenue ($13) is greater than marginal cost ($6), the added production likely increased profit, even though the price per unit dropped. If added costs had instead run $15 per unit, the same $13 in marginal revenue would signal a loss on each additional unit, and the expansion would need a non-financial reason to make sense, such as building customer relationships or using idle capacity.

Why marginal revenue can fall as sales rise

In some markets, a business can sell more only by reducing its price, and that lower price may apply to many or all units sold, not just the newest ones. As a result, total revenue still rises, but more slowly.

Consider a hypothetical subscription provider earning $10,000 from 100 customers. It lowers its monthly price enough to gain 20 more customers, and total revenue becomes $11,400.

• Change in total revenue: $11,400 − $10,000 = $1,400
• Change in quantity: 120 − 100 = 20 customers
• Marginal revenue: $1,400 ÷ 20 = $70 per customer

This does not automatically mean the decision was poor. It means the business needs to compare that $70 with the cost of acquiring, onboarding, and serving those new customers.

Use marginal revenue with marginal cost

A basic decision framework:

• If marginal revenue is greater than marginal cost, additional sales may add to profit.
• If marginal revenue equals marginal cost, the business has reached a common profit-maximizing decision point.
• If marginal revenue is less than marginal cost, expanding output may reduce profit.

Salesforce describes the point where marginal revenue equals marginal cost as the profit-maximizing "sweet spot." Salesforce's marginal revenue overview

Costs that rise with volume may include materials, sales commissions, shipping, payment processing, customer support, contractor time, or service delivery. A company may still accept lower short-term marginal revenue to enter a new market, retain an important customer, or build a longer-term relationship. Knowing the number simply makes that trade-off more deliberate.

Common mistakes to avoid

Using price instead of total revenue. Marginal revenue must come from the change in total revenue, not the listed price of the last unit sold.

Forgetting to measure the same period. If the earlier revenue figure covers one month, the later figure should too. Mixing periods distorts the result.

Ignoring discounts, returns, and credits. Use the revenue figure that reflects what the business actually earns, or marginal revenue can look stronger than it is.

Treating revenue as profit. The next unit may generate revenue but require even more in labor, fulfillment, or support costs.

Using a wide range without context. A calculation spanning 10 additional units may tell a different story than one spanning 10,000. Review several ranges when sales volume or pricing changes quickly.

How to use a marginal revenue graph

Put quantity sold on the horizontal axis and marginal revenue on the vertical axis, then plot marginal revenue for each added unit or sales range. Add a marginal-cost line if you have that data. Where the two lines meet marks the output level where additional revenue and additional cost are equal. For a visual walkthrough, Khan Academy offers a lesson using an orange juice scenario and graphs. Watch Khan Academy's marginal revenue and marginal cost lesson

Even without a graph, a simple spreadsheet tracking quantity, total revenue, change in revenue, change in quantity, marginal revenue, and marginal cost for each period can reveal the same pattern.

A practical checklist before making a decision

Before increasing production, adding a service tier, or discounting to win more sales, confirm:

1. What costs actually rise because of the additional volume?
2. Does marginal revenue exceed marginal cost, and by how much per unit?
3. Is there a strategic reason to proceed even if short-term margins are thinner?

Calculate the revenue change, divide it by the change in quantity, then weigh that result against what the extra business actually costs to serve.

Informational note: This article is provided for general informational purposes only and is not legal advice. It does not represent the advice or opinion of the website or organization on which it appears.