Break-even Analysis

A webshop is launching a new product and the team is stuck between two price points: a lower price expected to move more units, and a higher one with a healthier margin per sale. Everyone has an opinion about which will sell better. Nobody has worked out which one actually needs fewer sales to become profitable. That is what break-even analysis is for.

Break-even analysis works out the point at which sales revenue exactly covers costs: no profit, no loss. It rests on three figures: fixed costs (expenses that do not change with sales volume, such as rent or a fixed team), variable costs (expenses that rise with every unit sold, such as materials or shipping), and contribution margin, which is the price of one unit minus its variable cost. Contribution margin is the figure that actually drives the break-even point, more than price or cost alone. Expressed per unit it gives you the break-even point in units; expressed as a percentage of the price (the contribution margin ratio) it gives you the break-even point in revenue. The idea is straightforward once stated plainly: every unit sold contributes a fixed amount toward covering the business's fixed costs, and once enough units have been sold to cover those fixed costs entirely, every additional unit contributes directly to profit rather than to overheads.

• Use it whenever you are comparing pricing options and want to know how many units each one needs to sell before it turns a profit.
• Use it before committing to a fixed cost, such as new equipment or a new hire, to see how much extra volume it demands.
• Use it to sanity-check a sales forecast against what the business actually needs to sell to survive, not just to grow.
• Do not use it as a full profitability forecast: it shows the point of no loss, not the point of healthy profit.
• Do not treat fixed and variable costs as static for every scenario; a large enough volume change can shift what counts as fixed.

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Most people compare price points using revenue, or using price alone, and both are misleading. A higher price with a low contribution margin percentage can need almost as many units to break even as a lower price with a higher contribution margin percentage, once fixed costs and variable costs are actually accounted for unit by unit. Price is only half the story; what it costs to deliver each unit is the other half.

The second mistake is calculating break-even once and treating it as fixed. Every time a fixed cost changes (a new subscription tool, an extra warehouse shift) the break-even point moves, and a price point that looked comfortable a quarter ago may no longer be.

This is easiest to see when a business compares two products by revenue per unit alone. A product that sells for more per unit can still have a lower contribution margin percentage than a cheaper one, if its variable costs (materials, packaging, payment processing fees) eat up more of that higher price. Ranking products by price rather than by contribution margin routinely leads a business to push the wrong product, simply because the higher number on the price tag looks more attractive.

Illustrative example: a fictional company, not a customer case.

For the webshop: Price A is set lower, with a contribution margin of thirty percent of the selling price. Price B is set higher, with a contribution margin of forty-five percent. Fixed costs for the launch (a landing page build, a small paid ad budget, and packaging setup) are the same regardless of which price is chosen.

Worth checking too: if Price B's higher margin comes from materials that cost more to source reliably, the business should weigh that supply risk against the lower unit target before finalising a choice. A price point that needs fewer units to break even is not automatically the safer choice if the costs behind it are less predictable than the alternative.

Two formulas, and it matters which one you use. Break-even in units = fixed costs ÷ contribution per unit (price minus variable cost per unit). Break-even revenue = fixed costs ÷ contribution margin ratio. Dividing fixed costs by a percentage gives you euros of revenue, not a number of units. With illustrative numbers: fixed costs of €12,000; Price A €40 with €12 contribution per unit (30%); Price B €60 with €27 contribution per unit (45%). Price A breaks even at 1,000 units (€40,000 of revenue). Price B breaks even at 445 units (about €26,700 of revenue). Price B needs far fewer sales to cover the same fixed costs: a very different conclusion from simply asking which price feels more competitive. Check first: are the figures you are comparing units, euros or percentages? The card takes you through the remaining steps to a decision.

• Front: what break-even analysis is for and why contribution margin, not price, is the number that decides it.
• Back: the numbered steps to apply the model, plus a short worked example of its own. The company in this guide is a separate illustration, not the example printed on the card.
• Digital: a Google Sheets calculator for break-even units and contribution margin across multiple price scenarios, with a video tutorial.

• Cost-Volume-Profit Analysis extends break-even analysis into a full view of profit at different volumes.
• 5 Cs of Credit is useful once break-even numbers exist, since lenders will want to see them.
• Activity-Based Costing gives a sharper view of variable costs when a product has several distinct cost drivers.

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