Break-even point (BEP): What it is and how to calculate it
The break-even point is a major inflection point in every business and sales organization. Learn what it is and how to figure it out.
Published April 11, 2022
Last updated September 14, 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 explain 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 a business?
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, carefully choose a goal beyond that, and help bolster sales growth rates. Setting this goal also gives leaders a chance to try different strategies and discover what tactics are most effective for nurturing leads, boosting sales engagement, and ultimately sealing the deal.
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 decisions.
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 how flexible they can be when planning their tactics for different customers.
Once sales teams with price flexibility understand the value of their product and know the minimum selling price, they can start to shape sales price ranges for different accounts. They may use customer relationship management techniques like upselling and cross-selling, promotions, and discount rates. That way, companies can increase their sales win rate without the risk of losing money.
Helps determine 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 request 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 must sell at least that much product plus an ambitious percentage to hit growth targets.
Your BEP can also give your team some direction that isn’t solely reliant on activity metrics. You’ll be able to focus on other top key performance indicators and ensure your team stays on track.
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 track 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.
How to calculate your break-even point
If you’re looking to use 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 visualize. But it’s also important to understand exactly how your break-even point formula in sales works.
Break-even point formula
The general break-even point formula is dividing your fixed costs by your gross profit margin:
You can find this information in your company’s financial statements, but we highly suggest tracking it in real-time (along with the rest of your sales operations metrics) in your CRM.
Some companies—especially smaller businesses and startups—may use only this basic formula to calculate their break-even point. However, it’s more common to split the formula into two measurements: units (products or services) and sales dollars.
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: These are the overall costs your company takes on. They can include rent, insurance, or even the price of coffee for the office. Essentially, fixed costs are expenses that don’t change regardless of revenue.
- Price of each unit: This is simply the price of each product or service your sales team sells.
- Variable costs of each unit: You can think of these as manufacturing costs for each unit—the amount of labor, materials, and other resources needed to make it.
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 determine how many units you need to sell before your company can sustainably pay off its expenses. 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 another equation 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 costs by the profit gained from each sale, it uses the percentage of how much value you’re getting from each unit. 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 generate to break even.
Break-even point examples
Now that we’ve learned how to calculate break-even sales in different ways, let’s take a look at an example of these break-even point formulas in action.
Imagine 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. It needs raw materials to make the vacuums, as well as factory workers and managers to stay on top of production. The company’s variable cost per vacuum is $50, and these vacuums sell for $200 each.
The 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 per vacuum = 800 vacuums
As we can see from the equation, Company V needs to sell 800 vacuum cleaners to break even for Q2.
However, Company V gives sales commissions based on total revenue, so it also needs to know the total dollar amount it’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 revenue per vacuum = $160,000
Company V now knows it needs to sell $160,000 worth of vacuums to break even on its quarterly investment.
How to interpret break-even analysis
When looking at a break-even analysis, you usually see one of three outcomes:
- Profit: Revenue is greater than your variable cost plus your fixed cost.
- Break-even: Revenue is equal to your variable cost plus your fixed cost.
- Loss: Revenue is less than your variable cost plus your fixed cost.
The break-even point is a valuable number to know, but hitting it is never the goal. Without pushing past the BEP and into the profit zone, it’s nearly impossible to achieve any long-term growth. You might not be losing any money at your break-even point, but you’re also barely scraping in enough to pay salaries, stock inventory, and sell your products. If an emergency or economic crisis arises, you may find yourself in serious financial trouble.
The good news is that by analyzing your break-even point, you can find ways to improve your performance.
For example, one of the common culprits of revenue loss is a high total fixed cost. If you notice that you’re struggling to top your BEP, it might be time to do a value-chain analysis to itemize and eliminate unnecessary costs. If half your staff is working remotely, for instance, you don’t need to spend as much money on in-office resources. Reducing expenses lowers your break-even point and increases your opportunities for profits.
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 need to 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. You can then generate BEP reports and share them across your company to encourage different departments to implement actionable changes.
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.