What this measures
Every business has costs that stay the same no matter what, and costs that grow with each sale. The break-even point is where your revenue has covered both, the moment you stop losing money and every sale after that starts contributing to profit.
The formula
The difference between price and variable cost is called your contribution margin, what's left from each sale to put toward fixed costs. If you don't sell discrete units, switch to the percentage mode instead, which works the same way using a variable cost ratio rather than a per-unit price.
A quick example
Say your fixed costs are $10,000 a month, you sell a product for $50, and it costs $30 in materials and packaging to make. Your contribution margin is $20 a unit, so you'd need to sell 500 units to break even, which works out to $25,000 in revenue. Sell fewer than that and you're operating at a loss, sell more and everything past 500 units is profit.
Frequently asked questions
What if my variable costs are close to or above my price?
Then break-even isn't just far away, it's impossible at those numbers. If each sale costs you as much or more than you charge for it, no volume of sales will ever cover your fixed costs. You'd need to raise your price, lower your variable cost, or both.
Which mode should I use, per unit or by revenue percentage?
Per unit works best when you sell a physical product with a clear price and cost per item. Percentage of revenue works better for services, subscriptions, or anything where "per unit" doesn't really apply, since it only needs to know what share of each dollar of revenue goes to variable costs.
What happens below and above the break-even point?
Below it, your revenue hasn't yet covered your fixed costs, so you're operating at a loss. Above it, every additional sale is pure contribution to profit, since fixed costs are already covered.
How can I lower my break-even point?
Four levers, generally used in combination: cut fixed costs, cut variable costs per unit, raise your price, or some mix of the three. The "what if your price changed" section above lets you test one of those levers directly.