How to calculate your break-even point

Your break-even point is the number of units you have to sell, or the revenue you have to bring in, before you stop losing money. Below it you are making a loss. Above it every extra sale adds to your profit. To find it, divide your fixed costs by the profit you make on each unit: price minus variable cost.

This guide walks through the formula, a full worked example, and the ways you can move the number. You can check any of the figures with the break-even calculator.

The two kinds of cost

The calculation depends on separating your costs into two groups.

Fixed costs stay the same for the period you are looking at, whatever you sell. Examples are rent, salaries, software subscriptions, insurance and a loan repayment.

Variable costs rise with each unit you sell. Examples are materials, packaging, shipping, payment processing fees and sales commissions.

Some costs sit in between. A phone plan with a fixed fee plus a charge per use is partly both. For a first estimate, put each cost in whichever group it behaves like most. You can refine it later.

The formula

Start with the contribution margin per unit. This is what each sale contributes towards covering your fixed costs:

Contribution margin = price − variable cost per unit

Then:

Break-even units = fixed costs ÷ contribution margin

To get the revenue at that point, multiply by the price:

Break-even revenue = break-even units × price

Pick one period and stick to it. If the fixed costs are monthly, the answer is units per month. If they are yearly, the answer is units per year.

A worked example

Imagine you sell a printed planner online.

• Fixed costs per month: $2,000. This covers your website, a design subscription and a storage space.
• Selling price: $40 per planner.
• Variable cost per planner: $15 for printing, packaging and payment fees.

Step 1: contribution margin. $40 − $15 = $25. Each planner you sell leaves $25 to cover fixed costs.

Step 2: break-even units. $2,000 ÷ $25 = 80. You need to sell 80 planners a month to cover your costs.

Step 3: break-even revenue. 80 × $40 = $3,200. You need $3,200 in monthly sales.

Step 4: check it. Revenue of $3,200 minus variable costs of 80 × $15 = $1,200 leaves $2,000. That matches your fixed costs exactly, so profit is zero. That is what break-even means.

If you sell 100 planners, you have 20 more than break-even, and each of them adds $25. Profit is 20 × $25 = $500. If you sell 60, you are 20 short and you lose $500.

Adding a profit target

Break-even only tells you where you stop losing. Most people want to know how many sales it takes to earn something. Add the profit you want to the fixed costs:

Units for a target = (fixed costs + target profit) ÷ contribution margin

If you want $1,000 a month from the planners, the calculation is ($2,000 + $1,000) ÷ $25 = 120 planners. That is 40 more than break-even, which shows how quickly the target moves out of reach if the margin per unit is thin.

What moves the number

There are three levers.

Raise the price. If you charge $45 instead of $40, the contribution margin goes from $25 to $30 and break-even drops from 80 to about 67 units. A small price rise can have a large effect, but you also need to consider whether fewer people will buy.

Lower the variable cost. If you find a printer that charges $12 instead of $15, the margin goes to $28 and break-even falls to about 71 units. Buying in larger batches is one common way to get there.

Cut fixed costs. If you drop the storage space and save $300 a month, fixed costs become $1,700 and break-even falls to 68 units.

You can combine them, and it is worth testing a few scenarios before you decide. The calculator makes this quick since you can change one input and see the new result straight away.

Mistakes to avoid

Leaving out your own time. If you work full time on the business, put a realistic salary for yourself in the fixed costs, or the break-even number will look easier than it is.

Forgetting payment and platform fees. These are variable costs that are easy to miss because they come out of the payout. Include them in the variable cost per unit.

Mixing periods. Yearly fixed costs with a monthly sales forecast gives a meaningless answer. Convert everything to the same period.

Using one average for very different products. If you sell items with very different margins, the single-product formula is only a rough guide. Calculate each product separately, or use a weighted average based on the mix you expect to sell.

Treating break-even as a forecast. The formula tells you what you need, not what you will get. Compare it with a realistic estimate of how many units you can actually sell. If the break-even number is higher than that estimate, you need to change the price, the costs or the plan.

When the price is too low

If the price is equal to or below the variable cost, the contribution margin is zero or negative. Each sale then adds nothing or loses money, and no sales volume can cover your fixed costs. Either the price is too low or the product costs too much to make. Better to find that out on paper than after the first order.

Services and subscriptions

The same method works if you sell time or a subscription. For a freelancer, a unit can be an hour or a project. For a software subscription, a unit can be a paying customer per month, with hosting and payment fees as the variable cost. If you are setting a rate for client work, the freelance hourly rate calculator starts from your costs and income goal in a similar way.

Putting it to use

Work out your break-even point before you commit money to a product, a new tool or a bigger space. Keep the figures somewhere you can update them, and redo the calculation when your prices or costs change. Tax and accounting rules vary by country, so check how your local rules treat costs such as equipment or home-office expenses before you rely on the numbers for anything official.