Marginal Benefit Definition in Economics

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Marginal benefit is the incremental value a customer perceives from purchasing and using an additional unit of a good or service. It is a pivotal economics concept in that companies must recognize that customers don't always value later units as much as initial units purchased.

Marginal Benefit Basics

The theoretical marginal benefit of the first unit of a good purchased is its sale price. If a customer pays $10 for a good, for instance, you could say the marginal benefit is $10. In reality, a customer may have a willingness to pay $12 or $15, which means the company may be missing an opportunity for more revenue.

With many goods, a customer's perception of worth goes down on the second purchase and any subsequent purchases. If a customer buys a new winter coat for $100, the marginal benefit of buying another coat is likely not $100. The basic need has been met. If the business offers two coats for $175, but the marginal benefit for the customer is $100 for one coat and $50 for a second, the deal probably won't work.

Business Applications

Marginal benefit has a number of important business applications, especially related to marketing and pricing strategies. Company operators need to realize that a customer compares the additional or marginal cost of a subsequent purchase to the marginal benefit.

Assume a cafe charges $2 for the first hot dog and $1.50 for a second. If a customer places a marginal benefit of $1.50 or more on the second hot dog, he may purchase it given the marginal cost of $1.50. However, if a customer typically gets full after one hot dog, the marginal cost of $1.50 for a second likely outweighs the marginal benefit. Companies often conduct research to identify the optimum price point for such deals.

An additional consideration for a business is the added expense of selling a second item relative to selling a first. Many companies factor in the cost of acquiring a customer when pricing initial purchases. Those costs aren't relevant, then, on a subsequent purchase. Therefore, the company has more room to adjust prices to align with marginal benefits.

Tip

  • The economic principle of diminishing marginal utility dictates that in most cases, the marginal benefit decreases with each additional unit of consumption.

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