Calculation of break-even point
How do you find the magic point that allows a business to stay afloat? As a low-margin business, dropshipping tends to turn a profit faster than standard e-commerce shops. It is easier to move forward when you know how many items you need to sell to cover all your costs.
The break-even point is the volume of sales at which the company makes neither a profit nor a loss, and all the company's costs are fully covered by sales. It is important to know this figure because it shows, albeit very roughly, how sustainable and financially stable the business is.
Identifying costs
Finding the break-even point is often like solving a jigsaw puzzle. You need to remember nothing and analyse all your costs, revenues and sales, preferably in advance. You need to know which products or services will bring you more profit and which will cost you more. What do I need to take into account?
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Fixed costs are costs that remain the same regardless of the number of sales. Examples include the cost of hosting and maintaining the site, subscription fees for using an electronic payment system, and advertising costs.
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Variable costs are costs that vary in proportion to the number of sales (cost of goods, commission on payment systems, cost of delivery and packaging of goods).
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Customer acquisition costs - approximate investment in advertising and marketing. When starting a business should consider free or low-cost marketing in social networks, create a blog on the site.
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Acquiring - commissions from payment systems and acquiring companies.
How do you count a point? The formula
You can calculate the break-even point using a simple formula: you need to know the total costs (fixed and variable) and the unit price. Fixed costs remain constant and do not depend on sales volume, while variable costs vary with sales volume.
Break-even point (in units) = Fixed costs / (unit price - variable costs per unit)
Let us illustrate the calculation using the example of a company that has
Fixed costs, e.g. $1000 per month.
The average unit price is $50
Variable costs are $20.
Let's use the formula to calculate the break-even point:
Break-even point = $1000 / ($50 - $20) = 33.3
The company therefore needs to sell at least 33 units to cover its costs and break even.
Break-even is not a static indicator. Customer preferences, the market and competitor behaviour change. You need to recalculate your break-even point regularly. This will allow you to adjust your strategy and maintain sustainability.
Getting to zero
Calculating the break-even point is extremely important for start-ups. It helps to determine the minimum sales volume required to cover all expenses and reach "zero" (when the profit is zero). This helps to plan finances and make informed decisions for the successful growth of the business.
Determining the break-even point is also useful in an ongoing business. Such an analysis allows for cost optimisation and shows the effectiveness of marketing strategies. Knowing the break-even point allows the company to avoid financial risks. It should be noted that the formula does not take into account market trends and competitors. If demand changes, the break-even point should be recalculated.
By calculating the break-even point for partner and customer business, Halla Systems experts can forecast sales dynamics based on supply logistics. By analysing the data, we can easily track even small changes in customer demand and the competitive environment.