Break even point

What the break even point means

The break even point is the quantity or revenue at which a project covers its costs. Below it there is a loss, above it there is profit. The figure answers the question of when something pays for itself and is therefore suited to any project with costs: a new channel, a new assortment, a discount campaign or an additional team member.

How it is calculated

The common formula is fixed cost divided by the unit contribution margin. The unit contribution margin is the selling price minus the variable cost per unit, meaning purchase price, shipping, packaging, payment fee and the share of returns. The result is the number of units at which fixed cost is covered.

An example: a product sells for 60 euros and the variable cost is 36 euros. The unit contribution margin is 24 euros. If the fixed cost of the project is 4,800 euros, the break even sits at 200 sales.

Where the lever for advertising sits

For paid advertising a minimum value can be derived from it. Anyone with a contribution margin of 24 euros per sale and an average ad cost of 12 euros has to produce one order from two clicks. If the rate falls below that, the campaign burns money no matter how many visitors it brings. This calculation is the basis of every advertising plan and replaces the search for a general target value.

What the calculation hides

• Returns: they cost shipping and handling and are not a fixed cost item but reduce the contribution margin of every single sale.
• Setup and running cost: a new channel needs setup, training and ongoing attention. Only part of that is fixed cost in the sense of the formula.
• Delay: the point is reached in the calculation but not on day one. Anyone forgetting the period confuses success with progress.
• Staff as fixed cost: a team member raises fixed cost permanently, a project does not.

Frequent questions

• Is it the same as the break even ROAS? Not quite, but the two are connected. ROAS works with revenue, the break even point with contribution.
• Why does it matter for discounts? Because a discount lowers the contribution margin and makes the required quantity rise faster than the discount.
• Is one value per shop enough? No, it has to be determined per product and per channel.