The break-even point is the exact level of sales at which your total revenue equals your total costs. Below it, you are losing money. Above it, you are making money. Knowing where that line sits is essential before you set a price, sign a lease, hire staff, or evaluate whether a product is worth launching.
This guide walks you through each calculation step with a worked example, then covers extensions including revenue break-even, margin of safety, SaaS break-even, and the effect of a price change.
What You Need
Before you start, collect three numbers:
- Total fixed costs — costs that do not vary with output volume
- Selling price per unit — what one customer pays
- Variable cost per unit — what it costs you to produce or deliver one unit
Step 1: Identify Your Fixed Costs
Fixed costs are costs you incur regardless of how many units you sell. Rent, salaries, insurance, software subscriptions, and loan repayments are all fixed costs. If you sell 0 units this month or 10,000 units, these costs are the same.
List every fixed cost and sum them up. For this example:
| Cost item | Monthly amount |
|---|---|
| Rent | $8,000 |
| Salaries | $5,000 |
| Insurance | $500 |
| Software subscriptions | $500 |
| Total fixed costs | $14,000 |
Round up to $15,000/month for a small buffer in your planning.
It is important to include all fixed costs — entrepreneurs often undercount by forgetting about annual expenses (licences, audits, equipment leases). Convert those to monthly amounts and include them here.
Step 2: Identify Your Variable Cost per Unit
Variable costs scale directly with each unit you produce or sell. Raw materials, packaging, inbound freight, payment processing fees (typically 2–3% of the transaction), and per-unit commissions all count.
For this example, variable cost per unit is $12.
Check your variable cost estimate carefully. If your variable costs include percentage-based fees (payment processing, marketplace commissions), compute them at your expected selling price so the figure is accurate.
Step 3: Set Your Selling Price
Your selling price is the amount the customer pays — before any discounts. For this example, the selling price is $40 per unit.
If you offer different prices to different customer segments or plan to run promotions, use a blended average price weighted by expected sales volume.
Step 4: Calculate Contribution Margin per Unit
Contribution margin is the amount each unit sold contributes toward covering fixed costs — and eventually, profit.
Contribution Margin = Selling Price − Variable Cost per Unit
Contribution Margin = $40 − $12 = $28
This means every unit you sell gives you $28 to put toward your $15,000 monthly fixed cost obligation. Once all fixed costs are covered, each additional unit sold generates $28 of operating profit.
The contribution margin ratio expresses this as a percentage of price:
Contribution Margin Ratio = $28 / $40 = 70%
Seventy cents of every dollar of revenue contributes to covering fixed costs and profit.
Step 5: Calculate Break-Even in Units
Divide total fixed costs by the contribution margin per unit:
Break-Even Units = Fixed Costs / Contribution Margin per Unit
Break-Even Units = $15,000 / $28 = 536 units/month
Selling 535 units leaves you $28 short of covering fixed costs — you are in the red. Selling 537 units means you have made $28 of profit. The exact break-even is 535.7 units, which you round up to 536 because you cannot sell a fraction of a unit.
Use the Break-Even Calculator to run these calculations instantly and adjust any variable to see the impact in real time.
Step 6: Calculate Break-Even in Revenue
Sometimes it is more useful to express break-even as a monthly revenue target rather than a unit count — especially when you manage multiple products.
Method 1 — multiply by price:
Break-Even Revenue = Break-Even Units × Selling Price
Break-Even Revenue = 536 × $40 = $21,440/month
Method 2 — divide fixed costs by contribution margin ratio:
Break-Even Revenue = Fixed Costs / Contribution Margin Ratio
Break-Even Revenue = $15,000 / 0.70 = $21,429/month
The small difference is rounding. Either method is valid; the contribution margin ratio method is faster when you already know the ratio.
Step 7: Calculate Margin of Safety
The margin of safety tells you how far your current sales can fall before you hit break-even. It is a buffer measure — a higher margin of safety means your business can absorb a larger demand shock without going into the red.
If your current monthly sales are 700 units:
Margin of Safety (units) = Current Sales − Break-Even Sales
Margin of Safety (units) = 700 − 536 = 164 units
Margin of Safety (%) = (Current Sales − Break-Even Sales) / Current Sales
Margin of Safety (%) = 164 / 700 = 23.4%
A 23.4% margin of safety means sales can fall by nearly a quarter before you start losing money. Use the Profit & Loss Calculator to model what happens to profit at different sales volumes above break-even.
Break-Even for SaaS Businesses
Software-as-a-service businesses have a structure where variable cost per user is very low — typically payment processing (2–3%) and a small amount of support cost. The primary driver of break-even is monthly recurring fixed costs divided by average revenue per user (ARPU).
SaaS Break-Even Subscribers = Monthly Fixed Costs / (ARPU − Variable Cost per Subscriber)
If monthly fixed costs are $50,000, ARPU is $25, and variable cost per subscriber is $0.75:
Break-Even Subscribers = $50,000 / ($25 − $0.75) = $50,000 / $24.25 ≈ 2,062 subscribers
This is the minimum active subscriber count to cover costs. Because SaaS businesses have high operating leverage — nearly all revenue above break-even becomes profit — reaching this threshold quickly is critical.
How a Price Increase Affects Break-Even
Raising your price by $5 (from $40 to $45) increases contribution margin from $28 to $33:
New Break-Even Units = $15,000 / $33 = 455 units/month
You need 81 fewer sales each month to break even — a meaningful improvement for the same fixed cost base. This is why pricing decisions have an outsized effect on business viability. Run different price scenarios in the Break-Even Calculator before finalising your pricing.
The Margin Calculator helps you see how price changes interact with margin targets.
Break-Even Chart
A break-even chart plots two lines against unit volume on the x-axis:
- Total Revenue — starts at zero and rises at the rate of the selling price per unit
- Total Costs — starts at the fixed cost level ($15,000) and rises at the variable cost rate per unit
The point where both lines intersect is the break-even point. To the left of that intersection, total costs exceed revenue (loss zone). To the right, revenue exceeds total costs (profit zone). The vertical gap between the two lines at your current sales volume represents either the loss or the profit you are making.
Key Terms
- Fixed Costs — costs that remain constant regardless of production or sales volume
- Variable Costs — costs that increase proportionally with each unit produced or sold
- Contribution Margin — selling price minus variable cost per unit; the amount each sale contributes toward fixed costs and profit
- Margin of Safety — the percentage by which current sales exceed break-even sales; a measure of downside buffer