What is the Break Even Point?

A very simple and critical tool to measure success in business. As marketers we use it every day, a difference you’ll find when working with marketers versus web designers for your digital strategies. When contemplating a Social Media Ad campaign, a Google Adwords campaign, or other digital marketing effort you're best plan is to work with a marketer that understands numbers and strategy.

When analyzing any business venture there are always several voices and metrics that are looked at and considered. Several times a year and maybe several times a month depending on your business, ideas arise in order to grow the business. Whether it’s growing a customer base, engaging deeper with partners, or launching a new marketing campaign, leadership is tasked with making the company better. See SBA's Breakeven Analysis Article

The one constant in all these decisions is of course money. More specifically what is profitable and what is a loss. In order to help clarify and direct any business venture or in this case any marketing initiative, there is one tool that dominates all others, the Break Even Point Formula.

The Break Even Point Formula

BEP = Fixed Costs / (Price - Variable Costs)

[ Download this formula graphic ]

BEP = Break Even Point. The number at which the company makes no profit and has no losses. The number usually used as a baseline for effectiveness of any campaign.

Fixed Costs = All costs associated with the effort. These costs stay the same no matter how many sales or money is generated. Marketing is considered a fixed cost. 

Price = The dollar amount of an item or sale. The cost your customer is expected to pay.

Variable Costs = Costs that are impacted directly by the level of sales or units sold. Examples such as labor, materials, shipping, packaging, commissions, etc. Generally these go up as sales increase and go down as sales go down.

BEP Explained In A Simple Example

ABF Printing is a business that sells printing products to companies. One such product is business cards.

They have a certain business card they sell at $100 for a box. A box contains 250 business cards. 

$100 is the Price of the item. 

It costs the company $25 to produce and ship the cards to the customer, including labor, materials, equipment, and shipping costs. 

$25 is the Variable Cost. 

Now, the company has decided to run a marketing campaign to increase sales of this particular item and they want to determine the best path and ROI. They have $1,000 to spend on this marketing campaign.

$1,000 is the Fixed Cost.

To put this into the formula:

BEP = $1,000 / ($100 - $25)

or 

The Break Even Point for this campaign is just over 13 unit sales. If the company sells 14 units the campaign is profitable!

So as a marketing firm when working with a client like this we can quickly and easily breakdown a direction of where and how we want to tackle any initiative. In the example above we look at what effort will net the maximum profit with a baseline of 14 sales.

CONCLUSION:

The Break Even Point Formula is a simple tool that can help your company determine the value and return on investment for any campaign or inititaitve. Leverage this formula for your next marketing plan and track the results.

Have you been tracking your marketing efforts?

If you are a business owner, leader, or marketer that would like more of these formulas all in one spot download our free book Marketing Stats That Matter

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