Every business has costs it must pay whether or not anyone buys anything: rent, software, insurance, a salary. Break-even analysis answers a simple question about them. How many sales do you need before those costs are covered and you begin to make a profit? It takes a few minutes to work out, and it changes how you look at pricing, hiring and spending.
Fixed costs and variable costs
Fixed costs stay roughly the same however much you sell in a month. Rent, subscriptions, insurance and salaries are typical examples. Variable costs rise with each unit you sell: materials, packaging, per-order shipping, payment processing fees and sales commissions. The split matters because only the variable costs change with volume, and the difference between your price and the variable cost of one unit is what is left over to pay the fixed costs. That leftover is called the contribution margin.
The formula
Break-even units = fixed costs ÷ (price per unit − variable cost per unit). The bracket is the contribution per unit. Multiply the answer by the price to get break-even revenue.
A worked example
Imagine a small online shop with monthly fixed costs of 4,200: 1,500 for a workshop, 300 for software, 2,000 for a part-time salary and 400 for insurance. It sells a product at 35, and each unit costs 14 in materials, packaging and fees.
Each sale contributes 35 − 14 = 21 towards the fixed costs. Break-even is 4,200 ÷ 21 = 200 units a month, which is 7,000 in revenue. The first 200 units pay for the month's fixed costs. Every unit after that adds 21 of profit.
Expressed as a ratio, the contribution margin is 21 ÷ 35 = 60%, and 4,200 ÷ 0.60 gives the same 7,000. That version is handy for businesses that sell many different things, because you can work from revenue rather than counting units.
Setting a profit target
Break-even is where profit is zero, but you want more than that. To find the sales needed for a target, add the profit to the fixed costs before dividing. A target of 1,500 a month means (4,200 + 1,500) ÷ 21 = 271.4, so you need 272 units. It is a useful way to turn "I want to earn 1,500" into a sales number you can plan towards.
What moves the break-even point
Three levers change it. Raising the price to 38 lifts the contribution to 24, and break-even falls to 175 units. Cutting the variable cost from 14 to 12 raises the contribution to 23, and break-even falls to about 183 units. Reducing fixed costs, by renegotiating rent or dropping an unused subscription, reduces the target directly. Raising prices usually has the biggest effect, but it only helps if customers keep buying, so test it rather than assume it.
How far above break-even are you?
If you sell 320 units in a month, you are 120 above break-even. The margin of safety is 120 ÷ 320, or 37.5%, which means sales could fall by more than a third before you start losing money. Monthly profit in that case is 320 × 21 − 4,200 = 2,520. A thin margin of safety is a warning that a slow month could hurt, and it is a good number to track over time.
Selling more than one product
With several products, use a weighted average. Work out the average price and the average variable cost across your usual sales mix, and run the same formula. Alternatively, calculate each product's contribution and share the fixed costs between them sensibly. The result is only as good as the mix you assume, so revisit it when your best sellers change.
A second example: a one-person service business
Break-even works for services too, with hours in place of units. Suppose a freelancer has monthly fixed costs of 2,600, covering a share of a workspace, software, insurance and a modest personal wage. She charges 50 an hour, and platform and payment fees cost about 4 per billed hour. Each hour contributes 46. Break-even is 2,600 ÷ 46, or about 56.5 billable hours a month.
If she can realistically bill 100 hours a month, she needs to fill a little over half of them just to stand still. To earn an extra 1,000 of profit she needs (2,600 + 1,000) ÷ 46, or about 78 hours. This is a useful reality check on hourly rates: if the hours you can really sell are fewer than the break-even figure, the rate or the costs have to change.
How often to recalculate
Redo the numbers whenever a major cost, a price or your product mix changes, and at least once a quarter. It takes minutes, and it keeps you from running on figures that were true a year ago.
Mistakes that make the answer misleading
The most common one is leaving out your own pay. If the business must support you, include a realistic wage in the fixed costs. Another is treating a cost as fixed when it is not, or the reverse. Payment fees and shipping usually belong with the variable costs. Some costs are a mix, such as a phone plan with usage charges, and it helps to split them.
Others are forgetting discounts, returns and refunds, which reduce the average price you really receive, and using a period that does not match your fixed costs. Monthly fixed costs give a monthly break-even. Finally, remember that the calculation assumes prices and costs stay the same as volume changes, which is only roughly true in real life. Use it as a guide, not a guarantee.
Try it with your own numbers
Our break-even point calculator does the arithmetic from your fixed costs, price and variable cost. To check the price itself, see our guide on markup vs margin, and use the retail price calculator to work out a price from the margin you want. This article is general information, not financial advice.
