In the early days of their establishment, startups were often disorganized, lacking proper income records. For this reason, a method is required to calculate, record, and document everything accurately.
In business, this method is known as marginal revenue. Marginal revenue can help business owners discover an increase in startup income.
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What is Marginal Revenue?
Marginal Revenue
Marginal revenue refers to the increase in revenue derived from the sale of additional units. The higher the level of output, the lower the yield will be.
The marginal revenue calculation describes the change in total sales when there is a change in the number of products sold. Therefore, marginal revenue can be an excellent tool for determining the increase in a business’s revenue.
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How is Marginal Revenue Used in Business?
Marginal revenue serves several purposes in business. One of its uses is to compare income with output. If the marginal revenue per product unit is below the marginal cost, then the production of that unit will usually be stopped, and an evaluation will be carried out.
Marginal revenue can also help manage production costs and set prices. By referring to marginal revenue, production costs can be set at a moderate standard with a reasonable price.
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How to Calculate Marginal Revenue
Marginal Revenue
There are a few steps to calculate marginal revenue:
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Calculate the total revenue:
To calculate marginal revenue, the first thing to do is find the total revenue. The formula used to calculate total revenue is as follows: Total Revenue = current price x current sales
Example:
Current product price = Rp 10,000
Total products sold = 1,000 units
Total Income = Rp 10,000 x 1,000 = Rp 10,000,000
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Market analysis:
The next step is conducting market analysis to gain insight into alternative lower prices and the number of products sold at those prices. Market analysis is done by looking at the prices offered by competitors.
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Calculate the alternative revenue:
The basic formula for calculating alternative revenue is the same as the total revenue formula: Alternative Revenue = alternative price x alternative sales
For instance, if the alternative price for each product is Rp 7,000, and the number of alternative products sold is 2,000 units, then the total alternative revenue is Rp 7,000 x 2,000 units = Rp 14,000,000.
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Calculate the marginal cost:
After finding the values of total revenue and alternative revenue, we can start calculating the marginal cost. The calculation formula is as follows: Marginal Cost = (alternative revenue – total revenue) / (alternative sales – current sales)
Using the numbers from the previous example, the calculation is as follows: Marginal Cost = (Rp 14,000,000 – Rp 10,000,000) / (2,000 – 1,000) = Rp 4,000.
This calculation yields Rp 4,000, which is the change in revenue for each additional product sold.
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In conclusion, it is important for startups to calculate their marginal revenue to immediately discover whether their business is still viable and should be continued or if they have to choose another path. Regularly checking revenue can help startup owners evaluate and make necessary improvements. Marginal revenue helps startups examine their business development, whether it is growing rapidly or declining. If the results show a drop, the startup should be prepared to change a few things and implement a new strategy, such as product price adjustment, re-segmentation, etc.
