How to calculate break-even point: formula, examples and uses

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To calculate break-even point, you find the level of sales at which total revenue exactly covers total costs, so the business makes neither a profit nor a loss. Knowing your break-even point helps you set prices, judge whether a new product or location is viable, plan how many customers you need, and understand how much risk you carry. This guide explains fixed and variable costs, the formulas in units and revenue, worked examples for different businesses, and how to use the result.

Fixed and variable costs

Break-even analysis divides costs into two kinds:

• Fixed costs stay the same regardless of how much you sell, at least in the short term: rent, salaries of permanent staff, insurance, software subscriptions, loan repayments.
• Variable costs rise with each sale: materials, packaging, delivery, payment processing fees, sales commissions, and cost of goods for resold products.

Some costs are semi-variable, such as electricity in a factory or hourly staff. Split them into a fixed base and a variable part, or treat them as one or the other based on how they behave in practice.

Contribution margin

The contribution margin per unit is the selling price minus the variable cost per unit. It is the amount each sale contributes towards covering fixed costs and then profit. If you sell a product for 50 and its variable costs are 30, each sale contributes 20.

The contribution margin ratio is the contribution margin divided by price: 20 ÷ 50 = 40%. It tells you what share of each sale is available to cover fixed costs.

The break-even formulas

Break-even in units = Fixed costs ÷ Contribution margin per unit

Break-even in revenue = Fixed costs ÷ Contribution margin ratio

With monthly fixed costs of 10,000 and a contribution margin of 20 per unit, you need to sell 500 units a month to break even. In revenue terms, 10,000 ÷ 40% = 25,000 a month. Our break-even calculator works these out instantly.

Worked example: an online store

An online store sells a product for 40. Per order, it pays 16 for the product, 3 for packaging, 5 for delivery and about 1.20 in payment fees, a variable cost of 25.20. Contribution margin is 14.80, or 37%. Fixed costs are 2,500 a month for its store platform, software, a part-time assistant and advertising retainers.

Break-even = 2,500 ÷ 14.80 ≈ 169 orders a month, or about 6,760 in revenue. If the store currently sells 120 orders, it needs about 40% more orders to break even, or to raise prices, cut variable costs or reduce fixed costs. Use the online store cost calculator to check your fixed costs.

Worked example: a service business

A consultancy charges 80 an hour. Variable costs per billable hour, such as contractor costs for delivery and software usage, are 30, giving a contribution of 50 per hour. Fixed costs, including the owner's base salary, office, insurance and software, are 12,000 a month.

Break-even = 12,000 ÷ 50 = 240 billable hours a month. With two consultants each billing about 120 hours, the firm just breaks even. That shows how sensitive it is to utilisation: a few weeks of low billable hours means a loss. See how to set your freelance rate for the rate-setting side.

Worked example: a café

A café's average customer spends 8, with variable costs of 3 for ingredients, packaging and card fees, contributing 5 per customer. Monthly fixed costs, including rent, staff, utilities and equipment loans, are 15,000. Break-even = 15,000 ÷ 5 = 3,000 customers a month, about 100 a day if open 30 days.

The owner can now test ideas: raising the average spend to 9 through bundles, with variable costs of 3.30, gives a contribution of 5.70 and lowers break-even to about 2,630 customers a month. A POS system with good reporting shows average spend and margins by item; see how to choose a POS system.

Break-even for multiple products

Most businesses sell several products with different margins. Use a weighted average contribution margin based on your sales mix. If 60% of sales are product A with a 40% margin and 40% are product B with a 25% margin, the weighted margin ratio is 0.6 × 40% + 0.4 × 25% = 34%. Break-even revenue is fixed costs divided by 34%.

If the mix shifts towards lower-margin products, break-even rises even if total sales stay the same. Track margins by product, not only total revenue.

Margin of safety

The margin of safety is how far current sales are above break-even, as a percentage: (current sales − break-even sales) ÷ current sales. A business with sales of 40,000 and break-even of 30,000 has a margin of safety of 25%; sales could fall by a quarter before it makes a loss. A low margin of safety means high risk, and a reason to reduce fixed costs or improve margins.

Using break-even for pricing

Break-even analysis shows the effect of price changes. Raising price increases contribution per unit and lowers the break-even point, but may reduce volume. Calculate how much volume you could lose before a price increase reduces profit. For example, if a 10% price increase raises contribution per unit by 25%, you could lose up to about 20% of volume and still earn the same total contribution. See margin vs markup and the profit margin calculator.

Using break-even for decisions

• New location or product: estimate the added fixed costs and contribution, and check whether realistic sales exceed break-even.
• Hiring: a new salary adds fixed costs; calculate how many extra sales are needed to cover it.
• Discounts and promotions: a discount reduces contribution per unit, so you need more sales to earn the same contribution.
• Outsourcing: moving a fixed cost to a variable cost, or the reverse, changes break-even and risk.

Break-even and cash

Break-even is usually calculated on an accounting basis, but cash timing matters too. A business can be above break-even on paper and still run out of cash if customers pay late or inventory ties up money. Combine break-even analysis with cash flow planning; see how to calculate cash runway and the cash runway calculator.

Break-even for startups

Startups often operate below break-even deliberately while they grow. The useful question is how much revenue is needed to break even at the planned cost base, and how long it will take to get there. If the answer is beyond your runway, you need funding, faster growth or a smaller cost base. Unit economics, such as LTV and CAC, determine whether growth brings you closer to break-even or further away; see LTV and CAC explained.

Limits of break-even analysis

• It assumes prices and variable costs per unit are constant, which may not hold at different volumes.
• Fixed costs are only fixed within a range; growth eventually requires more staff or space.
• It ignores timing of cash flows.
• Sales mix changes affect the result.

Use break-even as a guide for decisions, not a precise prediction, and revisit it when costs or prices change.

Common mistakes

• Leaving payment fees, returns or delivery out of variable costs.
• Forgetting the owner's own salary in fixed costs.
• Using revenue break-even with a single product's margin when you sell many products.
• Assuming sales will be steady when they are seasonal.
• Calculating once and never updating.

Break-even with payment fees and returns

Online businesses often forget variable costs that only appear at checkout or after the sale. Payment gateway fees, typically a percentage plus sometimes a fixed fee, reduce contribution on every order; see payment gateway fees explained. Returns add shipping and handling costs and may make some products unsellable. Discounts and coupons reduce the effective price. Include all of these in variable costs per order, using averages from your own data, or your break-even point will be too low.

Break-even for subscription businesses

Subscription businesses can calculate break-even in subscribers: fixed monthly costs divided by the monthly contribution per subscriber, which is price minus variable costs such as hosting, payment fees and support per customer. If fixed costs are 20,000 a month and each subscriber contributes 25, break-even is 800 subscribers. Because subscribers churn, you also need to keep acquiring new ones just to stay at break-even; see LTV and CAC explained.

Reducing your break-even point

• Raise prices or increase average order value through bundles and upsells.
• Cut variable costs by negotiating supplier prices, reducing packaging costs or optimising delivery.
• Reduce fixed costs by cancelling unused software, renegotiating rent or outsourcing non-core work.
• Shift the sales mix towards higher-margin products.
• Reduce payment costs by encouraging cheaper payment methods for large orders.

Small improvements in each area combine into a much lower break-even point.

Target profit analysis

The same formula answers "how much do I need to sell to make a target profit?" Add the desired profit to fixed costs: required units = (fixed costs + target profit) ÷ contribution margin per unit. For example, with fixed costs of 10,000, a target monthly profit of 5,000 and contribution of 20 per unit, you need 750 units. This helps set realistic sales targets and shows whether a profit goal is achievable.

Using a spreadsheet or calculator

A simple spreadsheet with inputs for price, variable costs and fixed costs, and formulas for contribution, break-even units, break-even revenue and margin of safety, lets you test scenarios quickly. Add rows for each product to calculate a weighted average. Our break-even calculator covers the single-product case, and the sales forecast calculator helps estimate whether your expected sales will exceed break-even.

Example: should we open a second location?

A bakery with one shop considers a second location. The new shop would add 8,000 a month in fixed costs for rent, staff and equipment loans. Each customer contributes about 4.50 after ingredients and card fees. Break-even for the new shop alone is about 1,780 customers a month, roughly 60 a day. The owner checks foot traffic near the new site, compares it with the first shop's conversion rate, and estimates 70 to 90 customers a day after a few months. The margin of safety looks reasonable, but the owner plans for several months below break-even while the shop builds a following, and checks that cash reserves cover that period.

Break-even and pricing psychology

Break-even analysis tells you what you need financially, but customers decide what they will pay. Combine the numbers with research: what competitors charge, what customers value, and how they respond to price changes. Sometimes the right move is to raise prices and serve fewer, better customers; sometimes it is to lower prices to grow volume, if variable costs allow. Test changes on a subset of products or customers before applying them everywhere.

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