Break-even point | Definition, analysis, and formula
The break-even point is a major inflection point in every business and sales organization. Here’s what it is and how to figure it out.
Published April 11, 2022
Last updated April 11, 2022
Starting a business can feel a lot like gambling. There’s a significant financial buy-in up top, and you need to take risks if you want to make money. But when you’re down on your luck in gambling or business, the short-term goal may simply be to break even.
Break-even points exist across a variety of financial situations. Homeowners, investors, and stockbrokers all understand the line where financial investment meets financial return. By understanding your company’s break-even point (BEP), you’ll provide your sales team with crucial insights into quotas, pricing, and growth opportunities. This can inform not only your sales strategies but also your long-term business plan.
In this article, we’ll go over what the break-even point is, why break-even analysis is important, and how you can calculate your BEP for your sales team.
What is the break-even point in sales?
The break-even point is the moment when a company’s product sales are equal to its overall costs. In other words, it’s where total expenses and total revenue balance out.
Let’s talk about the basics. Companies have many fixed overhead expenses, such as rent, salaries, taxes, and insurance. Add in the variable expenses of supplies, materials, research and development, labor costs, and marketing (among others), and you get total expenses. Total revenue, on the other hand, refers to the money a company earns by selling its goods or services.
The BEP is simply the point at which revenue from sales covers all expenses. Sell less than that, and the company will lose money. Sell more than that, and the company’s gross profits will begin to soar.
Great sales leaders will use BEP analysis formulas to pinpoint the minimum quota for their sales teams, set a carefully chosen goal beyond that, and help bolster sales growth rates.
Benefits of break-even analysis
A BEP analysis is vital for meticulously tracking the number (or dollar amount) of sales needed to cover costs. But this type of analysis also has a wide range of benefits that can help companies make data-driven, forward-thinking business choices.
Enables sales teams to shape their prices
When companies find their BEP in sales, they understand the minimum prices they need to set for their products and services. This also gives sales teams insight into what kind of flexibility they can offer when planning their tactics for different customers.
Once sales teams with price flexibility understand the value of their product and know what the minimum selling price is, they can start to shape sales price ranges for different accounts. This can include planning customer relationship management techniques like upselling and cross-selling prices, promotions, and discount rates. That way, companies can increase their sales win rate without the risk of losing money.
Helps form sales targets
Smart sales targets are calculated based on company-wide revenue goals. Superimposing these goals onto a specific timeline tells you exactly what to ask from your sales team.
For example, if you need your team to sell 20,000 product units by the end of the year, you can plan sales targets to meet that goal. Or, if your BEP in sales is at $50,000, you’ll know that your team needs to sell at least that much product plus an ambitious percentage in order to hit growth targets.
Break-even points are only useful for each quarter by itself, so if your team has a slow sales velocity for the average account, it’s important to keep that in mind.
Helps companies keep an eye on sneaky expenses
Even the smallest expenses can add up over time, and if companies aren’t keeping tabs on these costs, it can lead to major surprises down the road.
Companies can use break-even equations to keep track of everything they expect to spend during any given quarter. They can even leave some room for error—that way, when emergency expenses pop up without warning on financial statements, it won’t lead to chaos for the accounting department.
Break-even point formula
If you’re looking to make use of the BEP to set sales price points or to formulate a sales plan template, you’ll need to know how to calculate it. With access to sales reporting software, your BEP is simple to calculate and easy to visualize. But it’s also important to understand exactly how your break-even point formula in sales works.
Let’s take a look at two different break-even analysis formulas that companies can use to find their BEP.
Break-even sales formula in units
Here’s the BEP formula to calculate break-even sales in terms of units sold:
Let’s break down what each of these values means:
- Fixed costs: This is a flat number that represents the overall costs your company takes on. This can include rent, insurance, or even the price of coffee around the office. Any resources that aren’t included for each individual product are part of your fixed costs.
- Price of each unit: This is simply the price of each unit your sales team sells.
- Variable costs of each unit: This is what each unit costs to make. You can think of these as manufacturing costs for each unit.
This BEP equation focuses more on the sales volume your team needs to reach.
By dividing the fixed costs by the total profit on each unit sold, you can find how many units you need to sell before your company can sustainably pay off its costs. This is helpful because it shows the minimum amount of units your company would need to sell before breaking even.
The result of this equation is a concrete number you can present at team meetings and use when customizing sales team dashboards. However, this is only useful when each unit sells for a set price. As mentioned previously, some sales teams will approach certain prospects with pricing flexibility as a sales tactic.
If your team does have price flexibility, then there is another equation that may be more helpful for determining how to get back to a net-zero revenue.
Break-even point in sales dollars
Here’s how to calculate break-even sales in dollars.
This equation looks similar to the previous BEP analysis formula, but it has one key difference. Instead of dividing the fixed cost by the profit gained from each sale, it uses the percentage of how much value you’re getting from each product. This is called the contribution margin ratio.
Instead of returning a BEP in units sold, this equation calculates the exact dollar amount your company would need to sell to break even.
Now that we’ve learned how to calculate break-even sales in two different ways, let’s take a look at an example of these break-even point formulas in action.
Step-by-step break-even analysis formula example
Let’s say that Company V is approaching Q2. Between insurance costs, salaries, property taxes, and leasing, the fixed quarterly costs are $120,000.
Company V is a titan in vacuum cleaner sales. They need raw materials to make the vacuums, as well as factory workers and managers to stay on top of their production. Their variable cost per vacuum is $50, and they sell these vacuums for $200 each.
Their sales leaders want to know the number of vacuum cleaners they’d need to sell to break even on their quarterly expenses so they can set sales metric targets for Q2.
Let’s plug these values into the unit equation.
Company V break-even sales in units:
$120,000 fixed costs / ($200 revenue for each vacuum – $50 variable costs for each vacuum)
$120,000 fixed costs / $150 revenue for each vacuum =
As we can see from the equation, Company V needs to sell 800 vacuum cleaners in order to break even for Q2.
However, Company V gives sales commissions based on total revenue, so they also need to know the total dollar amount they’d need to sell this quarter to break even.
Let’s plug the same values into the sales dollars equation.
Company V BEP in sales dollars:
$120,000 fixed costs / [($200 revenue for each vacuum – $50 variable costs for each vacuum) / $200 revenue for each vacuum]
$120,000 fixed costs / ($150 revenue for each vacuum / $200 revenue for each vacuum)
$120,000 fixed costs / 0.75 =
Company V now knows that they’d need to sell $160,000 worth of vacuums to break even on their quarterly investment.
It’s never just about breaking even
For any company looking to grow, the break-even point isn’t the goal—it’s the absolute bare minimum. Sales leaders should use these numbers as motivational markers to break past breaking even and inspire their sales team to make each quarter count.
There are a few ways to calculate your BEP, but if you have a strong CRM like Zendesk Sell, it can calculate the values for you. Request a demo of Zendesk Sell today to easily calculate vital sales formulas, set KPIs, and keep your sales team on track to hit ambitious, achievable goals.