Making smart decisions about resource allocation is crucial for maximizing profits.

One powerful tool that business managers can use to improve decision-making is marginal thinking—a concept rooted in economics and popularized by economist John List.

By focusing on the incremental costs and benefits of business actions, rather than relying on averages or total costs, marginal thinking allows business leaders to optimize operations, improve scalability, and make more informed strategic decisions.

This article will explain marginal thinking in detail, provide practical applications for tour operators, and offer example scenarios with data to illustrate its power in improving business outcomes.

What is Marginal Thinking?

At its core, marginal thinking is the process of evaluating the additional, or incremental, impact of a decision.

Rather than looking at the total or average cost of a business activity, marginal analysis assesses how much more or less benefit is generated from one additional unit of input.

In business management, this approach allows leaders to determine whether the benefits of an action outweigh its incremental costs, guiding decisions about resource allocation, scaling, and investment.

For example, suppose a tour operator is deciding whether to hire a new guide for the upcoming busy season.

Marginal thinking would lead them to assess whether the additional revenue generated by the guide’s tours would exceed the cost of hiring and training that person.

Marginal Thinking vs. Average Thinking

Traditional decision-making often relies on averages or totals. However, this can mask important variations.

Averages smooth out data, making it difficult to see how specific changes in inputs affect outputs.

Marginal thinking, on the other hand, focuses on each incremental step, giving a clearer picture of the real impact of a decision.

Consider a tour operator with an average revenue of $1,000 per tour.

If this operator adds more tours or activities, the marginal revenue—the additional revenue from each new tour—may be less than $1,000 if the market is saturated or if the operator reaches capacity in terms of time and staff.

Key Applications of Marginal Thinking for Tour Operators and Activity Providers

1. Resource Allocation: Hiring Additional Staff

One common challenge for tour operators is determining whether to hire additional staff during busy seasons. Marginal thinking can help here by evaluating the additional (marginal) cost of hiring versus the additional revenue generated.

Scenario Example
Let's say a rafting company is considering hiring an additional guide for the summer season. Each guide costs $3,000 per month in salary, and each rafting tour generates $500 in revenue. On average, a guide can lead 10 tours per month. Without marginal thinking, the business might assume that adding a guide is a no-brainer, thinking each guide generates $5,000 (10 tours x $500) in revenue.

However, applying marginal thinking requires a deeper look at the situation. If the company already has five guides who are each running 8-9 tours per month, adding a new guide may not result in a full 10 additional tours. Instead, it could lead to only 4-5 more tours due to capacity limitations in the number of customers or demand fluctuations. In this case, the additional guide might generate only $2,500 in revenue—well below their $3,000 monthly cost. Marginal thinking helps reveal that hiring an additional guide may not be as beneficial as initially thought.

2. Determining Pricing Strategies

Marginal thinking also plays a critical role in setting prices. When determining whether to offer discounts or premium pricing, businesses should consider the marginal benefit of each price change.

Scenario Example
Consider a zipline tour operator who charges $150 per ticket. The operator is thinking of offering a discount to increase bookings. They calculate that reducing the price to $120 could attract an additional 10 customers per week. Without marginal thinking, the operator might believe that the extra customers will easily make up for the lower price.

However, marginal analysis suggests looking at the incremental revenue and costs. If the tour’s fixed costs (such as guide salaries and equipment) are $100 per customer, lowering the price to $120 only generates an additional $20 of profit per customer. For 10 extra customers, that’s $200 per week. If the current profit at the $150 price point is already $50 per customer, the discounted price brings a marginal profit of only $200, compared to $500 with no discount. This marginal analysis shows that the discount might not be worth it in terms of profitability.

3. Strategically Scaling Operations

Scaling is often seen as the path to higher revenue, but without applying marginal thinking, businesses can easily overextend themselves. Marginal thinking helps ensure that each step of scaling (such as adding new tours, destinations, or products) generates enough benefit to justify the increased cost.

Scenario Example
A small activity provider offering guided hiking tours may consider expanding into mountain biking tours. Initial research shows that adding biking tours will require an upfront investment of $10,000 for bikes and equipment. Each biking tour is projected to bring in $300 in revenue, with a marginal cost (guides, maintenance, and insurance) of $200 per tour.

Marginal analysis can help determine the break-even point. If the business can offer 100 biking tours in a season, that’s $10,000 in profit (100 tours x $100). In this case, the marginal benefit just covers the initial investment, meaning that while expansion could work, the operator should be cautious about scaling further without more demand.

Challenges of Marginal Thinking

While marginal thinking is a powerful tool, it isn’t always easy to apply. One challenge is obtaining accurate data on incremental costs and benefits, especially in dynamic markets like tourism. Tour operators must track variable costs (such as fuel or staff overtime) that can change rapidly. Additionally, the temptation to over-rely on averages can lead to incorrect decisions if the marginal costs and benefits are not thoroughly evaluated.

Moreover, marginal thinking requires a shift in business culture. Managers need to foster an environment where small, data-driven adjustments are valued over sweeping, risky changes. This can help prevent the “sunk cost fallacy,” where businesses continue investing in unprofitable ventures because they’ve already sunk resources into them​.

Applying Marginal Thinking to Your Tourism Business

Marginal thinking offers a structured, data-driven approach to decision-making for tour operators and activity providers. By focusing on incremental changes and carefully evaluating the additional costs and benefits of each decision, businesses can make more efficient use of their resources, improve profitability, and scale wisely.

By embracing marginal thinking, tour operators can navigate the complexities of the tourism industry, avoiding costly mistakes and optimizing their operations for long-term success.

References

List, J. (2022). The Voltage Effect: How to Make Good Ideas Great and Great Ideas Scale. Random House.

Smith, A. (1776). The Wealth of Nations. W. Strahan and T. Cadell.