What is Break-Even Point?
The break-even point is the exact sales volume at which total revenue equals total costs, no profit, no loss. Beyond this point, every additional sale generates pure profit. Understanding your break-even point is essential for pricing decisions, launch planning, and determining whether a business model is viable.
The Formula
Break-Even Units = Fixed Costs ÷ (Price Per Unit − Variable Cost Per Unit) Break-Even Revenue = Fixed Costs ÷ Contribution Margin Ratio
Contribution Margin Ratio = (Price − Variable Cost) ÷ Price. This represents the percentage of each sale that contributes to covering fixed costs.
Worked Example
A subscription box company has $8,000/month in fixed costs, charges $45/box, and each box costs $18 in variable costs (materials, shipping, packaging).
- Contribution margin per unit = $45 − $18 = $27
- Break-even units = $8,000 ÷ $27 = 296.3 → 297 boxes/month
- Break-even revenue = 297 × $45 = $13,365/month
- Contribution margin ratio = $27 ÷ $45 = 60%
📌 The company needs to sell 297 boxes per month ($13,365 in revenue) to cover all costs. Every box sold beyond 297 generates $27 in profit.
Why This Matters
Launch viability
Before launching a product, break-even analysis tells you how many customers you need. If break-even requires 10,000 customers but your market has 5,000 prospects, the model won't work.
Pricing sensitivity
A $5 price increase might lower volume by 10% but dramatically reduce break-even point. Break-even analysis quantifies these pricing trade-offs precisely.
Risk assessment
The gap between your current sales and break-even point is your margin of safety. A thin margin of safety means any revenue dip pushes you into losses.
Common Mistakes
❌ Misclassifying fixed vs variable costs
Rent is fixed. Raw materials are variable. But what about salaries? Many are fixed up to a certain volume, then step up. Misclassifying costs distorts your break-even point significantly.
❌ Ignoring step-function costs
At 500 units you might need a second warehouse or additional staff. These step costs mean break-even isn't a single number, it shifts at different volume levels.
❌ Assuming constant pricing
If you offer volume discounts, your effective price per unit decreases as volume increases. This means you need to sell more units than a simple break-even calculation suggests.
Industry Benchmarks
| Category | Good | Average | Poor |
|---|---|---|---|
| SaaS Startups | 6-12 months | 12-24 months | 24+ months to break even |
| E-commerce | 3-6 months | 6-12 months | 12+ months |
| Physical Products | 1-2 years | 2-3 years | 3+ years |
Source: NYU Stern Damodaran Financial Analysis Database 2025
Benchmark data sourced from NYU Stern Damodaran Financial Analysis Database 2025.