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The break-even formula
Your break-even point is your fixed costs divided by what each sale leaves after its own costs. That difference between price and variable cost per unit is the contribution margin. With 2,500 euros of fixed costs a month, a price of 60 euros and 24 euros of cost per unit, every sale contributes 36 euros. 2,500 divided by 36 is 69.4, so from the seventieth sale of the month you make a profit.
Break-even revenue follows from the same numbers: fixed costs divided by the contribution margin ratio, the contribution as a share of the price. 36 out of 60 is 60 percent, and 2,500 divided by 0.6 is 4,167 euros of revenue a month. Work without VAT or sales tax throughout: it passes through your accounts and pays for none of your costs.
What your price does to break-even
The same business with 2,500 euros of fixed costs a month and 24 euros of cost per unit, at five prices.
- Price 40, contribution 16
- Units a month157
- Revenue a month6,250 euros
- Price 50, contribution 26
- Units a month97
- Revenue a month4,808 euros
- Price 60, contribution 36
- Units a month70
- Revenue a month4,167 euros
- Price 75, contribution 51
- Units a month50
- Revenue a month3,676 euros
- Price 90, contribution 66
- Units a month38
- Revenue a month3,409 euros
Going from 40 to 60 more than halves the units you need. A low price does not ask for a few more sales; it asks for twice as many.
Break-even in units, in revenue, and your margin of safety
Units answer how many items, clients, subscriptions or hours you must sell. Revenue answers how much money has to come in, which is the better measure when you sell many products at different prices and know your average contribution margin ratio.
| Measure | Formula | In the example |
|---|---|---|
| Contribution per unit | price minus variable cost | 60 - 24 = 36 euros |
| Contribution margin ratio | contribution divided by price | 36 / 60 = 60 percent |
| Break-even units | fixed costs divided by contribution | 2,500 / 36 = 70 units |
| Break-even revenue | fixed costs divided by margin ratio | 2,500 / 0.6 = 4,167 euros |
| Margin of safety | (expected sales minus break-even) divided by expected sales | 100 sales: 30.6 percent |
The margin of safety tells you how far sales can fall before you lose money. At 100 expected sales a month you can miss 30 of them. Enter your expected sales in the calculator to see the profit at that level too.
Break-even in Excel or Google Sheets
Put fixed costs in B1, price in B2 and variable cost in B3. =ROUNDUP(B1/(B2-B3),0) gives break-even in whole units and =B1/((B2-B3)/B2) break-even revenue. For the chart, list sales in column A from 0 to twice your break-even, costs in column B with =$B$1+$B$3*A2 and revenue in column C with =$B$2*A2; a line chart shows the crossing.
How many enquiries pay back a website
A 1,500 euro site, over one year
24 enquiries through the site6 sign: one in four
Site and a year of hosting1,800 euros
Margin of 6 clients1,920 euros
Orders of 800 euros excluding VAT at 40 percent margin, 25 euros a month for hosting and maintenance. Two enquiries a month carry the site.
Three businesses, three break-even points
A subscription product. Hosting, two salaries and tools cost 12,000 euros a month. A subscription is 49 euros a month and each customer costs 6 euros in payment fees, support and servers. Every subscriber contributes 43 euros, so you need 280 paying subscribers before the month breaks even. Churn works against you: lose 5 percent a month and you have to win 14 new subscribers every month just to stay there.
A consultancy selling days. Office, insurance, software and an assistant cost 4,200 euros a month, and a day is invoiced at 650 euros with 40 euros of travel. Seven days a month pay the fixed costs. Your own pay is a fixed cost too: a freelancer in Belgium who wants 3,000 euros net a month needs far more days, which the freelance rate calculator works out with Belgian contributions and tax.
An online shop that advertises. At a contribution margin ratio of 60 percent, an ad loses money once it brings in less than 1.67 euros of revenue per euro spent. That is your break-even ROAS: 1 divided by the ratio. Check your campaigns with the ROAS calculator and your margin per product with the margin calculator.
When a website pays for itself
A website is a fixed cost you pay once, plus hosting and maintenance every month. It pays back through the new clients it brings who would not have come otherwise. Pick "A website" in the calculator and fill in the price, the monthly cost, the value of an order, your margin and your close rate.
A site of 1,500 euros with 25 euros a month of hosting and maintenance costs 1,800 euros in its first year. If an average order is worth 800 euros and you keep 40 percent of it, each new client leaves 320 euros. Six clients pay for the site. If one enquiry in four signs, that is 24 enquiries in a year, two a month. The same logic sets your marketing spend: the marketing budget calculator shows how much you can invest without falling below break-even.
Pitfalls
- Leaving out your own pay. For a founder or freelancer, what you need to live on is a fixed cost.
- Underestimating variable costs: shipping, payment fees, returns and packaging all count per sale.
- Working with prices including VAT, which covers no costs.
- Using an average price when most sales are your cheapest product.
- Forgetting costs that rise in steps: a second hire, a bigger warehouse.
- Ignoring seasons: a monthly break-even says more than a yearly one when sales swing.
Break-even questions
How do you calculate the break-even point?
Divide fixed costs by price minus variable cost per unit. With 2,500 euros of fixed costs, a price of 60 and a unit cost of 24, that is 2,500 divided by 36: 70 units.
How do you calculate break-even revenue?
Divide fixed costs by the contribution margin ratio. 2,500 euros of fixed costs at a ratio of 60 percent gives 4,167 euros of revenue.
What is a contribution margin?
What a sale leaves after the costs that come with it: price minus variable cost. A product sold at 60 that costs 24 has a contribution margin of 36.
How many enquiries does a website need to pay back?
Its price plus running costs, divided by the margin per client, divided by your close rate. A 1,500 euro site with 25 euros a month needs six clients worth 320 euros of margin each; at one in four that is 24 enquiries a year.