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break-even point

Also called: break-even, breakeven, breakeven point

The level of sales at which revenue exactly covers all costs, so the business neither loses nor makes money. For a subscription product it is usually expressed as a number of paying customers: fixed costs ÷ (revenue per customer − variable cost per customer).

The break-even point is where revenue exactly covers costs: below it the business loses money every month, above it the business makes money. For a subscription product the handiest form is a number of customers: break-even customers = fixed monthly costs ÷ (monthly revenue per customer − variable cost per customer). The difference in brackets is the contribution each customer makes towards the fixed costs.

Fixed costs are the ones that don't change with each new customer: salaries, rent, the accountant, base subscriptions. Variable costs grow with every customer: SMS, payment fees, per-customer services. Split them honestly, because a cost that looks fixed at 50 customers often turns out to grow at 200.

Break-even is not one number for all time: every new hire or price change moves it. It's worth recalculating for each decision (can we afford a developer? what happens if we raise the price?) and for different "levels" of the business. Whether the founders' own pay is part of the fixed costs is a choice: without it you get the point where the company stops burning cash; with it you get the point where the founders can live on it.

Example

In October of year 2 GarageDesk's fixed monthly costs are support 16,000 + contract developer 35,000 + accountant 4,000 + the founders' 2 × 40,000 = 135,000 UAH. Tools and SMS, about 50 UAH per shop, are variable. ARPA is 687.50 UAH.

Contribution per shop = 687.50 − 50 = 637.50 UAH. Break-even = 135,000 / 637.50 ≈ 211.8, so 212 shops. GarageDesk has 240 shops, 28 above that point, and makes 240 × 637.50 − 135,000 = 153,000 − 135,000 = 18,000 UAH a month.

Common mistakes

  • Using the list price. Use real revenue per customer (ARPA), after discounts and annual plans.
  • Calling a growing cost "fixed". Support and infrastructure often step up as customers grow.
  • Forgetting the founders. Decide explicitly whether their pay is in; both answers are useful, but say which.
  • Calculating it once. Every hire and price change moves the point; recheck before each decision.