What is Marginal Analysis?

Marginal analysis is a process that seeks to identify the relationship between the additional or marginal benefits received from engaging in a specific activity and the additional costs that are associated with that activity. The goal of this type of analysis is to get an idea of the overall satisfaction that can be derived from the effort, while also considering both primary and ancillary costs associated with that particular effort. Doing so makes it much easier for consumers to make comparisons of different purchasing options, and go with the one that provides the most satisfaction while still being considered worth the cost.

Consumers tend to utilize marginal analysis as a matter of course when choosing between two or more similar products. This is done by identifying the primary benefit derived from each product, then determining if there are any other aspects of the individual products that would provide some additional benefit or incentive. For example, a consumer may compare two different laundry detergents that are both capable of effectively cleaning clothes, and find the cost for each product is similar. While both products fulfill that primary need and are considered reasonable in terms of cost, the consumer will often go with the product that provides the most desirable scent to the washed clothing, a secondary, or marginal, benefit that increases the desirability of that particular brand of detergent.

This same process of marginal analysis is utilized when a consumer is choosing between two restaurants. While the two restaurants provide similar entrées at similar prices, one restaurant has a reputation for serving larger portions. A consumer who does not mind eating leftovers may consider the larger portions an added or marginal benefit that can be obtained with little to no extra cost. As a result of this exercise of marginal analysis, the consumer enjoys part of the entrée at the restaurant, and takes the rest home to be eaten that evening or the next day.

Key to the process of marginal analysis is understanding and properly evaluating the changes in variables that could sway the outcome of the decision making process. For example, the laundry detergent that was favored previously may be rejected next time, since the consumer has tired of the scent. In like manner, the diner may choose a different restaurant when eating out again, owing to the fact that the other restaurant offers a wider range of side dishes with the desired entrée. Shifts in consumer tastes or changes in pricing are variables that may influence what primary and secondary benefits a consumer identifies with a given purchase option, and make a difference in the consumer’s final decision.