Break-Even Analysis

Every new product, shop, or subscription has to answer one question before anything else: how many do we have to sell each month just to stop losing money? That is the break-even question. Get the answer wrong — or skip the exercise — and you can be busy, even seemingly successful, while quietly burning cash every single month.

Two kinds of cost

Before the formula, you need two vocabulary words, because break-even lives on the difference between them.

Fixed costs are expenses that stay the same every month regardless of how much you produce or sell. Rent, salaries, software subscriptions, loan repayments — these bills arrive whether you sell one unit or one thousand. In our candle example the studio lease plus the helper’s wages totals $6,000 per month, fixed.

Variable costs are expenses that rise in direct proportion to the number of units you sell. Each extra candle requires extra wax, wicks, and packaging. In our example those materials cost $20 per candle. Make zero candles and you spend $0 on materials; make 100 and you spend $2,000.

The split matters because fixed costs do not go away if sales are slow — they become a debt you must work off. Variable costs, by contrast, you only incur when you actually produce.

Contribution margin — the engine

Now here is the key concept: contribution margin per unit (shortened to contribution margin) is what each sale contributes toward covering the fixed costs, after paying its own variable cost.

Contribution margin = price per unit minus variable cost per unit

For the candle brand:

• Price per candle: $50
• Variable cost per candle: $20
• Contribution margin = $50 minus $20 = $30 per candle

Every candle sold chips $30 off the fixed-cost pile. The fixed pile is $6,000. So the business needs to chip away at $6,000, $30 at a time.

The break-even formula

Break-even units = fixed costs divided by contribution margin per unit

break-even units = fixed costs ÷ contribution margin
                 = $6,000 ÷ $30
                 = 200 units per month

At 200 candles sold, total revenue equals total cost and profit is exactly zero — you are neither making money nor losing it. That is the break-even point.

Break-even revenue (the dollar figure instead of the unit count) is simply:

break-even revenue = 200 units × $50 = $10,000 per month

Try it — drag the sliders

The explorer below draws two lines on a chart: the revenue line (price times units) and the total-cost line (fixed costs plus variable cost times units). Where those two lines cross is the break-even point. The defaults match the candle example above.

Try raising the price slider — notice the revenue line rotates upward and break-even moves left (fewer units needed). Try increasing the variable cost — the cost line steepens and break-even moves right. Cut the fixed cost — the cost line drops and break-even moves left. Each slider change updates contribution margin, break-even units, and break-even revenue instantly.

What happens on either side of break-even

Below break-even, every unit you sell reduces your loss but does not eliminate it. You are using each unit’s $30 contribution margin to pay down the fixed-cost pile, but the pile is not yet gone.

At break-even, the pile is exactly gone. Profit = $0.

Above break-even, the fixed costs are fully covered. Every additional unit’s full $30 contribution margin flows straight to profit. At 201 candles, profit is $30. At 300 candles, profit is (300 minus 200) times $30 = $3,000. The business is now leveraged on the upside by its fixed costs.

This is why high-fixed-cost businesses (airlines, streaming platforms, software companies) tend to have dramatic profits once they cross break-even — and dramatic losses when volume falls below it.

Margin of safety — your cushion

Once you know break-even, you can measure margin of safety: how far your current or expected sales are above break-even, expressed in units or as a percentage of sales.

If the candle brand currently sells 260 candles per month:

• Margin of safety = 260 minus 200 = 60 units, or 60 divided by 260 = 23%

That 23% is a cushion. Sales can fall 23% before you start losing money. A thin margin of safety means you are operating close to the edge; a large one gives you room to absorb a slow month or a price discount.

The one number you must not confuse

Edge case: negative contribution margin

If the price you charge is less than or equal to the variable cost per unit, the contribution margin is zero or negative. Every unit you sell either breaks even on variable costs alone (and you never cover fixed costs) or actively loses money. No volume of sales can save you — there is no break-even point. The explorer widget shows this: drag variable cost above the price and watch the lines never cross.

Next

Unit economics (CAC and LTV) — break-even analysis for a whole customer relationship: how much it costs to acquire a customer, how much revenue they generate over their lifetime, and when the relationship turns profitable.