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Dictionary
Debitoor's accounting dictionary
Marginal benefit

Marginal benefit - What is marginal benefit?

Marginal benefit is a measurement based on the price a buyer pays for a product or service and the general amount of satisfaction the buyer receives from purchasing more of that product or service

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When a consumer makes a purchase, they receive a certain amount of satisfaction from the purchase - whether it is for personal, business, or other use, a purchase generally fulfills a need and the result is a benefit to the buyer.

This is known as the marginal benefit and it generally increases to an extent and then begins to decrease as the buyer purchases more of the product/service. The marginal benefit is also tied to the price that the buyer is willing to pay. In other words, it also refers to the price that buyer will pay for more of the same item.

The usual path of marginal benefit

The highest marginal benefit occurs at the first purchase of a particular product or service. This is to say that the buyer experiences the most satisfaction after the very first purchase. After this, as a buyer purchases more, they still experience degrees of satisfaction that generally decrease with each purchase.

The decrease is known as ‘diminishing marginal utility’ or rather the decrease in satisfaction that the buyer experiences after they have reached saturation after purchasing multiple units of an item. This means that they will begin to feel less and less satisfied with more and more purchases.

Example of marginal benefit

For example, if a buyer purchases a plant for £20, they will likely be pleased with their purchase. If they’re offered the opportunity to purchase an additional plant, they might be tempted if the price is lower. So they might not be willing to pay another £20 but they would buy the second plant for £12.

If the buyer was then asked whether they wanted to purchase a third plant, they again will not want to pay £20 but also might not even be tempted by another £12 plant and instead only consider it if the plant were offered for £8.

Marginal benefit and marginal cost

Marginal benefit implies a clear advantage in the case of the buyer. The measurement is based on their experience and the price that they will pay for more units of the same product or service.

While marginal benefit focuses on the customer side, marginal cost is the producer side of the experience. Marginal cost refers to the cost that the business experiences in producing the additional item or providing an additional service.

Marginal benefit and your small business

When you’re running a business, it can be important to have a grasp of the marginal benefit and marginal cost for the products/services in your market. The insights gained from recording, analysing, and researching these two measurements can provide a business with useful information that will help them set a competitive pricing strategy.

Keeping track of the price of your products and the sales to each customer is crucial for this process, and is easier than ever with online invoicing software. Save products details and generate customer statements with a click.