What Is Marginal Cost?

By Adam Levy – Updated Nov 16, 2025 at 2:03 AM EST

Key Points

Marginal cost helps predict company profit by analyzing cost to produce extra units.
Investors use the gap between marginal cost and revenue to assess profitability.
Technology firms, due to low marginal costs, may lose initially but gain as they scale.

Marginal cost is the incremental expense of producing an additional unit. The concept is used to help determine optimal production levels and pricing for a business. Investors can use the concept to help forecast the profit growth of a company as it increases in scale.

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Net Profit Margin

A profitability ratio, calculated as (Net Profit / Revenue) × 100, indicating the portion of revenue turned into profit.

Many software and technology companies, for example, have very low marginal costs. Once a piece of software is created, it can be copied over and over again at practically no cost. The marginal costs would be things like support to get customers up and running using the software, maintenance costs to deal with customer issues and bugs found, and any additional costs associated with serving extra customers, like hosting costs for SaaS businesses. That’s why many technology companies will generate losses for a long time before they reach a scale at which they start to become extremely profitable.

Conversely, an online retailer has relatively high marginal costs. An online retailer has to pay for each item it sells at the wholesale price. It also has to pay shipping expenses and any additional labor costs to package and ship the item. An online retailer may have some fixed costs, such as storage and the costs of maintaining a website, but most costs are variable. That said, an online retailer may be able to achieve better wholesale prices with greater scale. Still, most online retailers should aim to become profitable quickly.

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About the Author

Adam Levy is a contributing Motley Fool stock market analyst covering technology, consumer, and financial stocks and how policy, economic, and consumer trends shape personal finance, Social Security and retirement savings. Before The Motley Fool, Adam was a financial advisor at Edward Jones. He studied finance and electrical engineering at Carnegie Mellon University.

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Adam Levy has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.