What Is the Break-Even Point, and How Do You Find It?
The break-even point is the sales volume at which you stop losing money and have not yet made any. The Break-Even Point Calculator finds it from your costs and price.
The two kinds of cost
Fixed costs do not change with how much you sell: rent, salaries, software, insurance. You pay them if you sell nothing.
Variable costs scale with each unit: materials, packaging, shipping, payment processing fees. Sell nothing and you pay none.
Some costs are genuinely both - a phone bill with a standing charge and usage on top - and are split between the two. Getting this classification right is most of the work, and misfiling a fixed cost as variable is the commonest reason a break-even figure is wrong.
The formula, and why the denominator is contribution
Break-even in units is fixed costs divided by the contribution per unit, where contribution is the selling price minus the variable cost per unit.
Not divided by the price. That is the error. If you sell at 50 with 30 of variable cost, each sale contributes 20 toward the fixed costs - not 50. With 10,000 of fixed costs, you need 500 units, not 200.
The contribution is what is actually left to pay the rent with, and it is why a high-revenue business with thin contribution can need enormous volume to break even.
What the number is for
Judging whether a plan is plausible. If break-even is 500 units a month and your market realistically buys 100, the problem is the model rather than the marketing. Finding that out with arithmetic is considerably cheaper than finding it out with a year of trading.
Testing a price change. Raising the price raises contribution per unit and lowers break-even volume, often by more than people expect - a 10 per cent price rise on a 20 contribution takes break-even down by about 20 per cent.
Judging a fixed cost. Any new fixed cost can be converted into the extra units it requires, which is a far more concrete way to assess a subscription or a hire than its monthly figure.
What it leaves out
Timing. Break-even is not the same as having cash in the bank - you can be above break-even and still unable to pay a supplier, because customers pay later than you do.
And it assumes one product at one price. Multi-product businesses need a weighted average contribution, which makes the figure an estimate rather than a line. Treat it as a planning number rather than a forecast, and anything you are deciding on the strength of it is worth checking with an accountant.
Common questions
How do I convert it to a revenue figure?
Multiply break-even units by the selling price. Or divide fixed costs by the contribution margin as a percentage.
Where do payment fees go?
Variable - they scale per transaction. The Payment Fee Calculator shows what they come to.
Should my own wages be a fixed cost?
If you are paying yourself a set amount, yes. Leaving yourself out produces a flattering and useless number.
What if I have no variable costs?
Then contribution equals price, and break-even is simply fixed costs divided by price. Common for software.
Want to know your own break-even volume?