Financial Glossary
Marginal Revenue
Marginal revenue is the additional revenue generated from selling one more unit of output, equal to the change in total revenue divided by the change in quantity sold. In a perfectly competitive market, price is constant and marginal revenue equals price. In markets with pricing power, each additional unit sold may require a price reduction (to attract the next buyer), causing marginal revenue to fall below price and decline as quantity increases. Firms maximize profit at the output level where marginal revenue equals marginal cost. Understanding marginal revenue is essential for pricing strategy, capacity decisions, and evaluating whether incremental volume is worth pursuing.
Problem & Application
An RV park currently sells 500 site-nights per month at $60 per night (total revenue $30,000). To attract 50 additional site-nights, management offers a promotional rate of $50 to price-sensitive travelers. Total revenue with the additional 50 nights is (500 times $60) plus (50 times $50), or $30,000 plus $2,500, equaling $32,500. The marginal revenue for those 50 additional nights is $2,500 divided by 50, or $50 per night. Marginal cost for those same nights (utilities and cleaning) is approximately $12 per night. Since marginal revenue of $50 exceeds marginal cost of $12, accepting the promotional bookings adds $1,900 in contribution margin, making the decision profitable at the margin. However, if the promotional price signals a market rate reduction and existing customers expect the lower rate at renewal, the strategy erodes revenue on the base, which is why dynamic pricing tools that target unsold capacity without advertising the discount broadly are common in hospitality revenue management.
In Short
Monitoring marginal revenue is essential for businesses to balance production costs with revenue generation to maximize profits.