Break-Even Analysis
Calculating how many sales/how much revenue is needed to cover fixed and variable costs. Break-Even Point = Fixed Costs / (Price - Variable Cost per Unit). Above this point, every sale is profit.
In practice
Break-even is the business's 'survival line.' Before investing in advertising, staff, or inventory — calculate break-even. 'How many sales must we make each month just to avoid a loss?' That's the number to memorize.
Common misconception
'Break-even is a one-time calculation.' Break-even shifts with every raise, new lease, added employee, or new discount. Recalculate break-even every time you add a fixed cost.
How to fix it
Don't know your break-even? (1) List all monthly fixed costs (rent, salaries, subscriptions), (2) Calculate average Contribution Margin (AOV × Gross Margin - Variable Costs), (3) Divide: Fixed Costs / CM = number of orders needed to break even. Simple.
Example
Cosmetics store: fixed costs $7,800/month. AOV $44, Contribution Margin $13. Break-even: 7,800/13 = 600 orders/month. Currently: 420 orders = losing $2,340/month. Clear target: +180 orders.
Priority
Calculate break-even before any investment. Before hiring: does the new break-even fit current revenue? Before opening a warehouse: what's the new break-even? A simple spreadsheet — 30 minutes.
Related terms
Keep learning. Metrics that touch the same area:
- Contribution MarginFinanceGross profit minus marketing, payment processing, and variable shipping costs. Contribution Margin = Net Revenue - COGS - Variable Costs. Reflects the real profit each order 'contributes' toward covering fixed costs.
- Gross MarginFinance(Sale price - COGS) / sale price × 100. The basis for every pricing and advertising decision.
- ROI – Return on InvestmentFinanceA general profitability metric: (net profit / investment cost) × 100. Different from ROAS — it includes all expenses.
- AOV – Average Order ValueFinanceTotal revenue divided by number of orders. The biggest lever for increasing revenue without more advertising.
- LTV / CLV – Customer Lifetime ValueFinanceTotal expected profit from a customer over the entire relationship. A healthy LTV:CAC ratio is 3:1.
- COGS – Cost of Goods SoldFinanceThe direct cost of producing or acquiring products sold. Includes: product + import shipping + customs + packaging.
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