Marginal Benefit

The maximum amount that the customer will be willing to pay for an additional service

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Written by CFI Team

What is Marginal Benefit?

Marginal benefit is the highest amount that a buyer is willing to pay for an extra unit of product. It is also known as marginal utility, and it accompanies any extra unit purchased after the first unit. A marginal benefit may also be used to refer to the satisfaction that a customer receives after purchasing an additional good or service. It typically decreases as the rate of consumption increases.

Marginal Benefit

Marginal benefits come with diverse uses in business market research and product advertising. A company needs to consider that each consumer evaluates the marginal cost of purchasing an extra unit compared to the marginal benefit derived from it.

Companies may conduct research on marginal benefits and use that information in setting up a pricing strategy for specific units. The research may also be used to determine the additional expenses needed for selling additional units.

Summary

Marginal benefit is the maximum amount that a customer is willing to pay for an additional unit of good or service.
When the utilization of a unit decreases, the marginal benefit for a customer decreases.
The first unit must be acquired for the marginal benefit to be applied to the additional unit purchased.

Understanding Marginal Benefits

The marginal benefit is highest during consumption of the first unit, and it decreases thereafter. This is due to a decline in the incremental rate of satisfaction associated with the consumption of the additional unit.

For example, if a customer is willing to pay $10 for a cake, the marginal benefit of consuming the cake is $10. However, the customer may be unwilling to buy an additional cake at $10 and may consider buying a second unit if the price falls to $7. In such a case, the marginal benefit has decreased from $10 to $7 for one extra unit of the product. The marginal benefit concept seeks to explain why customers are willing to pay a specific price for certain goods and services.

Types of Marginal Benefits

The following are the main types of marginal benefits:

1. Positive Marginal Benefit

The positive marginal benefit occurs when consuming more units of a product brings extra happiness to the consumer. For example, for a consumer who likes eating ice cream, the second ice cream would bring additional joy. Hence, the marginal benefit of consuming extra ice cream is positive.

2. Negative Marginal Benefit

A negative marginal benefit occurs when the consumer consumes too much of a certain unit, and the additional unit of the product has negative consequences. For example, eating the fifth slice of a sugary cake makes the person sick.

3. Zero Marginal Benefit

Zero marginal benefits happen after a customer consumes more of a unit that does not bring any additional measure of satisfaction nor any negative consequences. For example, a consumer may feel full after consuming three slices of a cake and wouldn’t feel any good by eating an extra slice. In such a case, the marginal benefit from consuming an extra cake is zero.

Maximizing Marginal Benefits

Most of the time, consumers are driven to spend their money on units that yield the maximum amount of satisfaction at the lowest marginal cost. One way to maximize marginal benefits is to purchase items that give the highest marginal benefit per unit. Food stores display prices on goods, which allows consumers to compare the cost per unit and make purchase decisions within their budget.

Falling Marginal Benefit

Marginal benefits decline as the consumed quantity increases. Customers typically receive less satisfaction from consumption as more units are being consumed. For example, when a consumer spends $7 for a $10 cake, the marginal benefit is $7. The more cakes the customer buys, the less they want to spend on the next cake.

The concept of marginal benefit explains how customers make choices according to their strict budgets. Generally, consumers will continue purchasing certain units whose marginal benefits are higher than the marginal cost. In a perfect market, the unit price is equal to the marginal cost. This explains why customers will buy multiple units of the same good until the marginal benefit falls to the unit price.

Law of Diminishing Marginal Benefits

The law of diminishing marginal benefits states that as more units of a product are consumed, the level of satisfaction derived from each unit will decline. Generally, consumer needs are limited, and the need for a specific unit can be fulfilled with a single purchase. However, to encourage additional consumption for certain units, the prices of the additional units must be lower than the price of the first unit.

Diminishing marginal benefits play a key role in a company’s pricing policy. It is because the price of a unit must be equal to the customer’s marginal benefit and the willingness to buy the item.

Additional Resources

CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advance your career, the following resources will be helpful: