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

To work out marginal revenue, subtract the earlier total revenue from the later total revenue, then divide by the increase in units sold. The result is the average additional revenue per unit across that interval, not necessarily the price charged for the newest unit. This distinction matters when a business changes prices or offers discounts to sell more, because the change may affect revenue from units it was already selling. Marginal revenue helps show whether added sales increase revenue, but it does not show whether they increase profit until you compare it with the added costs of producing, selling, and serving those sales. Use comparable figures and account for discounts, returns, and credits so the calculation reflects revenue the business actually earns.

What Marginal Revenue Measures

Marginal revenue (MR) measures the change in total revenue associated with a change in quantity sold. Its standard formula is:

Marginal Revenue = Change in Total Revenue ÷ Change in Quantity

In abbreviated form, MR = ΔTR ÷ ΔQ. The Investopedia marginal revenue guide explains the same relationship and why marginal revenue is often shown as a downward-sloping line on a graph.

Marginal revenue is not the same as total revenue, which is revenue from all sales; price, which is the amount charged per unit; profit, which remains after costs; or marginal cost, which is the added cost of producing or delivering more units. Total revenue can increase while marginal revenue declines. For example, a price reduction may encourage enough additional sales to raise total revenue even though the revenue gained per added unit is lower.

How to Calculate Marginal Revenue

Compare two sales volumes or two points in time. You need total revenue and quantity sold at each point, measured consistently. Subtract earlier total revenue from later total revenue to find the revenue change. Then subtract earlier quantity from later quantity. Divide the revenue change by the quantity change to calculate average marginal revenue per added unit across that range.

The calculation is: (Later total revenue − Earlier total revenue) ÷ (Later quantity − Earlier quantity). If quantity did not change, this formula cannot calculate marginal revenue for additional units because there is no change in quantity to divide by.

A Worked Marginal Revenue Example

An example from McCracken Alliance describes a manufacturer that sells 1,000 units at $25 each for total revenue of $25,000. It then sells 1,200 units at $23 each for total revenue of $27,600.

MR = $2,600 ÷ 200 = $13 per added unit

The added units have a listed price of $23, but marginal revenue across the interval is $13 per unit. The price reduction affects the overall revenue calculation rather than only the newest sales. The $13 figure is an average across the 200-unit increase. It does not mean that each added unit individually generated exactly $13.

Revenue alone does not establish whether the expansion improved profit. Suppose producing and shipping the extra 200 units required $500 more in materials and $700 more in packing and delivery labor. The added cost is $1,200, or $6 per unit. Marginal revenue of $13 exceeds marginal cost of $6 by $7 per unit, so the added production likely increased profit if those figures capture the relevant incremental costs. If marginal cost were $15 per unit instead, the added sales would bring in less revenue than they cost to serve.

Why Marginal Revenue Can Fall as Sales Rise

A business may have to lower its price to sell more. If that lower price applies to existing sales as well as new ones, it can reduce revenue from earlier units. Total revenue may still rise, but the additional revenue divided by the additional quantity can be lower than the former price. The result depends on how much sales volume increases and how broadly the price change applies.

For example, a hypothetical subscription provider earns $10,000 from 100 customers. It lowers its monthly price to attract 20 more customers, and total revenue becomes $11,400. Revenue rises by $1,400 while customer count rises by 20, so marginal revenue across that increase is $70 per added customer. This figure alone does not show whether the pricing change was worthwhile. The provider must compare it with the added cost of acquiring, onboarding new customers, and serving them. It should also consider any effect on revenue from existing customers.

How to Use Marginal Revenue with Marginal Cost

Comparing marginal revenue with marginal cost helps assess whether additional output or sales could add to profit:

• If marginal revenue is greater than marginal cost, additional sales may increase profit.
• If marginal revenue equals marginal cost, the business is at a common profit-maximizing decision point, subject to its assumptions and other constraints.
• If marginal revenue is less than marginal cost, additional sales may reduce profit.

Salesforce's marginal revenue overview also describes the point where marginal revenue equals marginal cost as a profit-maximizing target. Costs that may rise with volume include materials, sales commissions, shipping, payment processing, customer support, contractor time, and service delivery. A business may still accept lower short-term returns to enter a market, retain an important customer, or use idle capacity. Comparing marginal revenue with marginal cost makes that trade-off visible. It does not prove that one choice is always right.

Common Calculation Mistakes

Using the selling price instead of the revenue change. The price of the last unit is not necessarily marginal revenue across a sales increase, especially when prices or discounts change.

Comparing different periods. If the earlier revenue covers one month, the later figure should cover a comparable month. Mixing periods can distort both the revenue change and the quantity change.

Ignoring discounts, returns, or credits. Use revenue that reflects what the business actually earns. Otherwise, the calculation may overstate the benefit of additional sales.

Treating revenue as profit. Marginal revenue does not subtract the extra labor, fulfillment, or support costs required to generate sales. Compare it with marginal cost before drawing conclusions about profitability.

Choosing a range that hides changes. An average across 10,000 added units can conceal a different pattern from an average across 10. Review smaller or successive ranges when prices, sales volume, or costs change quickly.

How to Read a Marginal Revenue Graph

Place quantity sold on the horizontal axis and marginal revenue on the vertical axis. Plot marginal revenue for each added unit or sales range. If marginal-cost data is available, add it to the graph. The point where the two lines meet identifies a quantity at which marginal revenue and marginal cost are equal. The business's circumstances and the assumptions behind the figures still matter. For a visual explanation, Khan Academy's lesson on marginal revenue also covers marginal cost.

A spreadsheet can show the same pattern without a graph. Track quantity, total revenue, changes in revenue and quantity, marginal revenue, and marginal cost for each period or sales range. Before increasing production, adding a service tier, or discounting to win more sales, identify which costs will rise and whether marginal revenue covers them. If it does not, consider whether there is a clear strategic reason to accept the short-term difference.

*This article is for general informational purposes only and is not legal advice.