The break-even point is the level of sales at which your total revenue equals your total costs — you're making neither a profit nor a loss. Understanding your break-even is essential for pricing decisions, investment appraisals, and business planning.
The Break-Even Formula
There are two versions: units sold and revenue.
Break-Even in Units
Break-even units = Fixed costs / (Selling price − Variable cost per unit)
The denominator (selling price − variable cost) is called the contribution margin per unit — the profit each unit contributes before covering fixed costs.
Break-Even in Revenue
Break-even revenue = Fixed costs / Contribution margin ratio
Where:
Contribution margin ratio = (Selling price − Variable cost) / Selling price
Key Definitions
Fixed costs: Costs that don't change with output — rent, salaries, insurance, software subscriptions, loan repayments.
Variable costs: Costs that change directly with output — raw materials, packaging, sales commission, transaction fees.
Selling price: What you charge per unit.
Contribution margin: What each sale contributes to covering fixed costs, then to profit.
Worked Example: Product Business
Scenario: You make handmade candles.
| Amount | |
|---|---|
| Selling price per candle | £15 |
| Variable cost per candle (wax, wick, jar, packaging) | £5 |
| Monthly fixed costs (rent, equipment, insurance) | £2,000 |
Contribution margin per unit:
£15 − £5 = £10 per candle
Break-even in units:
Break-even = £2,000 / £10 = 200 candles/month
Break-even in revenue:
Contribution margin ratio = £10 / £15 = 66.7%
Break-even revenue = £2,000 / 0.667 = £3,000/month
You need to sell 200 candles (£3,000 of revenue) per month to break even.
Worked Example: Service Business
Scenario: You run a freelance design studio.
| Amount | |
|---|---|
| Average project fee | £1,200 |
| Variable costs per project (software, assets) | £120 |
| Monthly fixed costs (salary, tools, rent) | £4,500 |
Contribution margin:
£1,200 − £120 = £1,080 per project
Break-even projects:
Break-even = £4,500 / £1,080 = 4.17 projects/month
Round up to 5 projects/month to ensure profitability.
Break-Even Chart
A break-even chart plots:
- Total revenue line: Starts at 0, slopes upward
- Total cost line: Starts at fixed costs (y-axis), slopes upward less steeply than revenue
- Break-even point: Where the two lines cross
Above the break-even point = profit. Below = loss.
Margin of Safety
The margin of safety shows how far sales can fall before you make a loss:
Margin of safety (units) = Actual sales − Break-even sales
Margin of safety (%) = (Actual − Break-even) / Actual × 100
Example: If you're selling 300 candles/month and break-even is 200:
Margin of safety = 300 − 200 = 100 candles
Margin of safety % = 100 / 300 × 100 = 33%
Sales could drop 33% before you'd start losing money.
Using Break-Even for Pricing Decisions
Scenario: Should you offer a 20% discount?
New selling price: £15 × 0.8 = £12. New contribution: £12 − £5 = £7.
New break-even: £2,000 / £7 = 286 candles/month.
You'd need to sell 43% more candles (286 vs 200) just to break even. Is that realistic? If not, the discount isn't worthwhile.
Break-Even for SaaS and Subscription Businesses
For subscription businesses, use monthly recurring revenue (MRR):
Months to break even = Total setup cost / (MRR − Monthly variable costs)
Example: You spent £50,000 building a SaaS tool. Each subscriber pays £29/month; your variable cost (hosting, support) is £3/subscriber.
If you have 100 subscribers:
Monthly contribution = 100 × (£29 − £3) = £2,600
Months to break even = £50,000 / £2,600 = 19.2 months
Limitations of Break-Even Analysis
Assumes linear relationships — in reality, variable costs per unit often decrease with volume (bulk buying) and prices may need to drop to increase volume.
Ignores time — selling 200 candles in December is different from selling 200 in July.
Fixed costs aren't truly fixed — at high enough volumes, you'll need more staff, larger premises, etc.
Use break-even as one planning tool, not the only one.