Marginal Profit: Definition, Formula & How to Calculate It

Marginal profit is the profit earned by a company when they sell one more unit of production. It is calculated as the marginal revenue (i.e., the amount of revenue earned by a company from the sale of one additional item of production) minus the marginal cost (i.e., the cost of producing one more unit of production).

Last updated: March 2026

What Is Marginal Profit and Why Does It Matter?

Marginal profit is a very important metric for firms to understand to decide how much they should produce, especially in a competitive market.

To understand marginal profit, it is important to differentiate the many "profits," as confusing the terms with "profit" in them could lead to poor decision making. Let's look at a few of them:

Marginal profit: Marginal profit is defined as the amount earned by producing and selling one more unit of production.
Average profit: Average profit is defined as the average amount earned per unit of production.
Total profit: Total profit is defined as the total amount earned from selling everything produced.

Let's take a break here for a quick example. Let's imagine you are a clothing company using a price skimming strategy to maximize profits. You release a new t-shirt. You produce 100 t-shirts. To make these t-shirts, you need to spend $200 for a silk screening machine and $2 in materials and labor for each t-shirt (collectively referred to as the cost of goods sold (COGS)). You release the shirt with an initial price of $30 and sell 30 shirts in the first month. You then lower the price to $20 and sell 30 more. Finally, you advertise a BOGO (buy one, get one free) sale and sell the last 40 shirts for $15 each ($30/2).

Before showing the marginal profit, average profit, and total profit, let's define the related revenue and cost measures and then put down some equations.

Revenue definitions:

Marginal revenue: Marginal revenue is defined as the amount received from selling one more unit of production.
Average revenue: Average revenue is defined as the average amount received per unit sold.
Total revenue: Total revenue is defined as the total amount received from selling everything produced.

Cost definitions:

Marginal cost: Marginal cost is defined as the amount spent producing one more unit of production.
Average cost: Average cost is defined as the average cost per unit of production.
Total cost: Total cost is defined as the total amount spent on everything produced.

What Are the Marginal Revenue and Profit Formulas?

The marginal revenue formula is:

Marginal Revenue (MR) = Change in Total Revenue/Change in Total Quantity

The marginal cost formula is:

Marginal Cost (MC) = (Change in Costs)/(Change in Quantity)

The marginal profit formula is:

Marginal Profit (MP) = Marginal Revenue (MR) – Marginal Cost (MC)

The total profit formula is:

Total Profit (TP) = Total Revenue (TR) – Total Cost (TC)

The average profit formula is:

Average Profit = (Total Revenue – Total Cost)/Total Quantity

We now have all the tools and information needed to answer some basic questions about the example outlined above.

(1) What is the total profit?

First, let's total the revenue. We sold 30 shirts at $30, which is 30 × $30 = $900. We then sold 30 more for $20 each, which 30 × $20 = $600. Finally, we sold 40 for $15, which is 40 × $15 = $600. Thus, the total revenue is $900 + $600 + $600 = $2100.

Next, let's total the expenses. There are two types of expenses here. The first is the fixed expense, which means it doesn't change with the quantity produced. That's the $200 machine. The next are the variable expenses, i.e. the ones that change with volume produced, which are $2 per shirt or $2 × 100 = $200 total. Thus, we have total costs of $200 + $200 = $400.

Finally, total profit is the revenue minus expenses, or $2100 – $400 = $1700.

(2) What is the average profit of the t-shirts?

We know that the total profit is $1700 and the quantity produced is 100. Therefore, the average profit is $1700/100 = $17.

(3) What is the marginal profit of the 1st, 20th, 50th, and 100th shirts?

This will be easier to see in table format:

Shirt	Marginal Revenue	Marginal cost	MARGINAL PROFIT
1	$30	$202	-$172
20	$30	$2	$28
50	$20	$2	$18
100	$15	$2	$13

The marginal revenue of the shirts comes in three blocks. The first 30 shirts have a marginal revenue of $30, the next 30 have a marginal revenue of $20, and the last 40 have a marginal revenue of $15. Marginal revenue is just the sale price.

The marginal cost of the shirts comes in two blocks. The first shirt requires buying equipment, which means it has the very high marginal cost of $202 (the $200 machine plus the $2 materials and labor cost). The next 99 items all have a marginal cost of $2 (the material and labor cost).

When you put these together, you get that the first item has a negative marginal profit of –$172 (also called a marginal loss), then shirts 2 to 30 have the same $28 marginal profit, 31 to 60 have a marginal profit of $18, and finally 61 to 100 have a marginal profit of $13.

In a SaaS business, things can often look similar. Since there can be a lot of expenses accrued before you ever sell your first subscription, the marginal profit of the first client can be negative, but since the marginal costs of running a SaaS platform (hosting fees, maintenance, etc.) are generally fairly low compared to the initial R&D the marginal profit of the following customers can be substantial.

While these calculations for a simple company selling one product can be fairly easy and intuitive, they can get pretty complicated for a SaaS business.

Baremetrics makes it easy to collect and visualize all of your sales data. When you have many clients, some are subscribed on an annual basis while others monthly, with multiple tiers and various add-ons, it can be difficult to calculate your MRR, ARR, LTV, and so much more. Thankfully, there is Baremetrics to do all of this for you.

Your SaaS company likely uses a CRM and/or payment processing software, and the data required to compute these core metrics can be all over the place. Integrating innovative software that can cull MRR values from CRM and payment processing systems is a valuable shortcut.

How is profit maximized when marginal profit is zero in a competitive market?

The idea that profit is maximized when marginal profit is zero sounds like voodoo. The point to remember is that total profit does not equal marginal profit, and likewise average profit does not equal marginal profit.

Marginal profit is defined as the difference between marginal cost and marginal revenue at each point along the marginal cost and marginal revenue curves:

(Note that MC is marginal cost, ATC is average total cost, D is demand, AR is average revenue, MR is marginal revenue, P is the market price, and Q is the quantity produced.)

In this figure, wherever the green line (marginal revenue, i.e. the selling price) is above the blue line (marginal cost) there is profit. If the blue line were extended to the price axis, then there'd be a marginal loss (the blue line is above the green line) for the first small quantity as the fixed costs are too high at such a low volume to turn a profit, just like our example above.

Taking all the profit in the area between the green and blue curves and subtracting the triangular area to the left where the blue curve is above the green curve would get you the total profits.

This can be represented by averaging the costs and drawing a rectangle:

(Note that MC is marginal cost, ATC is average total cost, D is demand, AR is average revenue, MR is marginal revenue, P is the market price, C is cost, and Q is the quantity produced.)

In this figure, P – C (price minus average cost over that quantity) represents the average profit, while the whole rectangle is the total profits.

So why is total profit maximized when the marginal profit is zero? That's when the rectangle is as long as possible. Even though the final item sold generates no marginal profit, each previous item has generated marginal profit, which means that selling until the marginal cost equals the marginal revenue leaves no money left on the table—you have sold to every customer from whom you can generate some profit.

Key Takeaways

Marginal profit is defined as the amount earned on one additional item of production. It is affected by your marginal cost and marginal revenue structures.

SaaS enterprises often exhibit economies of scale, whereby their marginal cost decreases with the increase in production. In this situation, revenue can be the bigger factor in profitability.

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FAQ

What is marginal profit and why does it matter for subscription businesses?

Marginal profit is the additional profit earned from producing and selling one more unit, calculated as marginal revenue minus marginal cost.

For SaaS and subscription businesses, this metric matters because the cost structure is unusual: early customers often generate negative marginal profit due to high upfront R&D and infrastructure spend. Once those fixed costs are absorbed, the marginal cost of adding a new subscriber stays low, so marginal profit per customer can grow significantly. Understanding marginal profit helps SaaS founders and finance teams decide when to expand, adjust pricing tiers, or invest in acquisition, rather than guessing based on total profit alone.
How do you calculate marginal profit? A step-by-step guide for SaaS founders
To calculate marginal profit, subtract the marginal cost of one additional unit from the marginal revenue generated by that same unit.

Here is how to run the calculation for a subscription business:
- Calculate marginal revenue: divide the change in total revenue by the change in subscribers or units sold.
- Calculate marginal cost: divide the change in total costs by the change in quantity, including hosting, support, and onboarding costs for that cohort.
- Apply the formula: Marginal Profit = Marginal Revenue minus Marginal Cost.
Baremetrics surfaces the MRR, ARR, and revenue movement data you need to run this marginal profit analysis without building custom reports in a spreadsheet.
What is the difference between marginal profit, average profit, and total profit?

Marginal profit measures the gain from one additional unit, average profit is the mean gain across all units sold, and total profit is the full amount earned across everything produced.

All three numbers can tell a different story at the same moment. A SaaS business might show strong total profit while marginal profit on new subscribers is declining, which signals a pricing or cost problem before it shows up in headline revenue. Confusing these three measures leads to poor production and pricing decisions. Using marginal profit analysis alongside MRR tracking gives subscription businesses a more accurate picture of unit economics than total profit alone.
How does marginal profit relate to SaaS unit economics like LTV and churn?

Marginal profit is a core input to SaaS unit economics because it shows whether each additional subscriber adds real value or quietly erodes it.

When marginal cost rises faster than marginal revenue, LTV shrinks and payback periods lengthen. High involuntary churn from failed payments makes this worse by reducing total revenue without reducing cost. Baremetrics tracks MRR movement, LTV by customer segment, and churn rate in real time, giving finance leads the data to spot when marginal profit on a pricing tier or acquisition channel is trending in the wrong direction before it hits the bottom line.
What is the difference between marginal profit and contribution margin for subscription businesses?

Marginal profit measures the incremental gain from one additional unit sold, while contribution margin measures how much revenue remains after subtracting variable costs across a broader output range.

In practice, contribution margin is the more common metric in SaaS financial modeling because it scales across pricing tiers and billing intervals more cleanly. Marginal profit is more useful for point-in-time decisions, such as whether to add a new pricing plan or offer a discount to close a deal. Both metrics rely on accurate variable cost data. For subscription businesses with multiple plans and add-ons, separating fixed from variable costs is where most of the analytical complexity lives.
How can you use marginal profit analysis to optimize SaaS pricing?

Marginal profit analysis helps SaaS teams identify which pricing tiers and billing intervals generate the most incremental value and which ones are diluting unit economics.

Start by calculating the marginal revenue and marginal cost for each plan tier or customer segment. If marginal cost rises sharply at higher usage levels but pricing does not scale accordingly, you are leaving margin on the table. Common levers to address this include usage-based pricing, tiered feature gating, or adjusting annual versus monthly billing ratios. Tracking MRR by plan in Baremetrics makes it straightforward to see how pricing changes affect expansion revenue, contraction MRR, and churn rate across different customer groups.
How can I reduce involuntary churn caused by failed payments to protect marginal profit?

Involuntary churn from failed payments directly destroys marginal profit because you lose revenue without reducing your cost to serve that subscriber.

Automated failed payment recovery is the most effective fix. Baremetrics Recover automatically retries failed charges, sends smart dunning emails, and helps subscription businesses recover revenue that would otherwise churn without any manual effort. For SaaS companies where marginal cost per subscriber is low, recovering even a small number of failed payments per month has an outsized impact on net MRR and LTV. Monitoring failed payment recovery rates alongside churn analytics gives finance teams a complete view of where subscription revenue is leaking.

What Is Marginal Profit?

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What Is Marginal Profit and Why Does It Matter?