Every business has costs that arrive whether or not anyone buys anything: rent, salaries, software, insurance. Your break-even point is how many sales it takes to cover them. Below it you lose money, above it you make money.
Fixed costs, variable costs and contribution
Fixed costs stay the same whatever you sell in a month. Variable costs come with each sale: materials, packaging, shipping, card fees. The difference between your price and your variable cost is the contribution each sale makes toward the fixed costs.
Contribution per unit
$50.00 − $30.00equals$20.00
Break-even units
$5,000 ÷ $20.00equals250 units
Break-even revenue
250 × $50.00equals$12,500
Every sale after the 250th adds $20 of profit. To make $2,000 of profit a month, you need 350 sales: the fixed costs plus the target, divided by $20.
Which lever moves it most?
Because break-even depends on the gap between price and variable cost, changes to either can make a big difference.
- Raise the price from $50 to $60: contribution becomes $30 and break-even drops to 167 units.
- Cut the variable cost from $30 to $25: contribution becomes $25 and break-even drops to 200 units.
- Cut fixed costs by $1,000: break-even drops to 200 units at the original price.
A price rise usually moves break-even the most, because it increases the contribution from every sale at once. The catch is that it may also reduce how many units you sell, which a calculator cannot predict for you.
When there is no break-even point
If your price is at or below your variable cost, each sale loses money or makes nothing, and you can never cover fixed costs by selling more. This happens more often than you would expect with heavy discounts or free shipping that costs more than planned.
Tip: Break-even assumes your costs and price stay fixed as volume grows. Recalculate when you hire, move premises or change suppliers.