What is Marginal Revenue?

Marginal revenue (MR) represents the additional revenue that a business earns from selling one more unit of a product. For an ecommerce business, understanding your marginal revenue can help you optimize pricing, enhance product offerings, and ultimately boost profits.

Understanding the Formula

The formula for calculating marginal revenue is pretty straightforward:

MR = ΔTR / ΔQ

Where:

• MR is the marginal revenue.
• ΔTR (delta TR) is the change in total revenue.
• ΔQ (delta Q) is the change in quantity sold.

Step-by-Step Guide to Calculating Marginal Revenue

Step 1: Determine the Change in Quantity Sold (ΔQ)

First, identify the initial and new quantities sold of the product. The change in quantity (ΔQ) is simply:

ΔQ = Qnew - Qinitial

Step 2: Calculate the Change in Total Revenue (ΔTR)

Next, calculate the total revenue before and after the change in quantity. Then, find the change in total revenue (ΔTR):

ΔTR = TRnew - TRinitial

Step 3: Divide ΔTR by ΔQ

Finally, divide the change in total revenue by the change in quantity sold to find the marginal revenue:

MR = ΔTR / ΔQ

Example Calculation

Let’s make sense of this with a practical example. Suppose you sell a product, and the initial quantity sold (Q_initial) is 100 units at a total revenue (TR_initial) of $1,000. You then sell 120 units (Q_new), generating total revenue (TR_new) of $1,200.

1. Calculate the change in quantity sold:

   ΔQ = 120 - 100 = 20 units

2. Calculate the change in total revenue:

   ΔTR = $1,200 - $1,000 = $200

3. Find the marginal revenue:

   MR = $200 / 20 = $10 per unit

Why Marginal Revenue Matters for Your Ecommerce Business

Understanding marginal revenue helps you make informed decisions about pricing, production levels, and marketing strategies. Here are a few benefits:

• Optimize Pricing: Adjust your prices to maximize profitability.
• Product Strategy: Determine which products to focus on based on their marginal revenue.
• Marketing Decisions: Allocate your marketing budget more effectively by understanding which products bring in the most additional revenue.