What Break Even Means
Your break even point is the amount of revenue you need to cover all your costs with zero profit and zero loss. Knowing this number is essential for pricing decisions, sales target setting, and understanding how much runway you have.
The Formula
Break even in units equals your total fixed costs divided by the contribution margin per unit. The contribution margin is the selling price minus the variable cost per unit.
For example, if your fixed costs are $10,000 per month, you sell a product for $100, and the variable cost per unit is $40, your contribution margin is $60. You need to sell 167 units per month to break even ($10,000 divided by $60).
Fixed vs Variable Costs
Fixed costs stay the same regardless of sales volume: rent, salaries, insurance, software subscriptions, and loan repayments. Variable costs change with each sale: materials, shipping, payment processing fees, and sales commissions.
List every cost in your business and categorise it correctly. Some costs have both fixed and variable components. A phone plan with a fixed base and usage charges is an example.
Break Even in Revenue
If you sell multiple products, calculating unit based break even is complex. Instead, use the revenue formula: break even revenue equals fixed costs divided by contribution margin ratio. The contribution margin ratio is your contribution margin divided by the selling price.
If your average contribution margin across all products is 50%, and your fixed costs are $10,000, you need $20,000 in monthly revenue to break even.
Why This Matters for Pricing
If your break even analysis shows you need to sell an unrealistic number of units, your pricing might be too low or your costs too high. Use break even to stress test different price points and cost structures before committing to a strategy.
Factor in Time
Calculate how long it will take to reach break even based on your realistic sales projections. This is critical for startups and new product launches. If break even is 18 months away, make sure you have enough cash to survive until then.
Revisit Regularly
Your costs change. Your pricing evolves. Your product mix shifts. Recalculate your break even point quarterly to ensure your business model remains viable and your targets are grounded in reality.