To assume that growth is good is natural. If your company sells even another unit, that has to be a win, right? However, each additional unit requires you to spend money and effort to make or order it from your suppliers. You may need to add more equipment or more staff if you already work in capacities. You may have to reduce the price if the market is saturated, which reduces revenue for all sales.
Prepare the calculation
Suppose you’re selling $10 each handmade necklaces. You make $100, sell ten necklaces. The marginal revenue of an 11th necklace is 10 dollars in additional sales divided by a single additional necklace. This is $10.
But if the market is saturated, nobody wants to purchase another collar. To increase sales, you have dropped the price to $9. The marginal income is now negative: 11 times 9 dollars are 99 dollars, which is -$1 your marginal income. To boost revenue, you must sell at least 12 necklaces. The sales of twelve collars amount to $10.00. Split the additional $8 by two additional collars, and you only receive $4 marginal income. You can decide that sticking with 10 $10 necklaces is better than adding it to the additional work.
What’s the cost of margins?
The only factor to consider is not price. Price. The low cost is the production side of marginal revenue – how much the additional unit will cost. The cost of increasing production will rise if you hire an employee to help build more necklaces. If you, however, start making so many collars to purchase the components in bulk, your costs can be reduced. If the marginal costs add up to more than the marginal revenue, you can afford more production. You would have to raise your sales price to remain in the black.
Competition and marginal revenue
Economists say monopolies have more time than companies on a competitive market to increase their marginal revenues. Marginal income usually amounts to the price of the product in a competitive market. Each unit added brings $15 marginal revenue if you price your units at $15 per unit.
Everyone who wants to buy it from you, if you’re the only one who makes your product. Growing sales are difficult because it is probably the price you are selling that nobody wants to. You have to reduce prices to move more units, which requires you to crush numbers to see whether the marginal income is worth it. The alternative would be to expand the new market fully.
