Break-even point for e-commerce: Formula, examples, and tips
The break-even point (BEP) is an important metric in determining the profitability of a business. Whether you are doing dropshipping, selling only one product, or planning to open an online store, analyzing the point of break-even will help you better map out your strategies to make a profit.
In this article, we will walk you through everything about the break-even point. From the definition, components of a break-even equation, to how you can optimize this metric for your success.
Break-even point: Definition and why it matters
Why should you do a break-even analysis?
According to Rob Stephens (CPA), the founder of CFO Perspective, break-even analysis provides a reality check for any investment you make in your business. This way, you can better understand the financial impact of your decisions and whether an investment is truly worth it. For example, if you're testing a new supplier, break-even analysis shows you exactly how many sales you need to cover those costs.
Furthermore, break-even analysis gives you a clearer picture of your cost structure. Indeed, Rob also mentions that by figuring out the least sales needed to cover your expenses. It’s much easier to answer whether you can exceed the sales needed to break even than it is to guess your future sales. Plus, working through the numbers helps you catch any expenses that might be forgotten and avoid unpleasant surprises later.
To determine the exact break-even point of your e-commerce business, you need to understand different components of the equation.
What goes into the break-even analysis formula?
There are a few basic formulas for you to calculate the break-even point for your business. They may look different, but they all use the same components:
Selling price: Also known as revenue per unit, the selling price is how much you estimate the value of your product and service. This is the most important component, as it decides whether you can cover your costs and make a profit. For instance, if you decide to raise your price, assuming the other things don’t change, your break-even point will be lower. Conversely, if you lower your price, you'll need more sales to break even.
Fixed costs: These costs are business expenses that don’t change in total amount. They are often referred to as overhead costs or indirect costs because you still need to pay these costs, even if you don’t sell anything. In the case of e-commerce, think about platform subscription plans, website hosting, and essential 3rd-party apps.
Variable costs: Unlike fixed costs, variable costs are expenses that change in direct proportion to the level of sales volume of a business. For example, an online store might spend more money on an ad campaign in the week before Black Friday compared to normal days. Some examples include the product costs purchased from wholesalers, fulfillment costs, discount costs, and transaction fees.
Contribution margin: This is the difference between the sale price and variable costs of a product. Contribution margin represents the amount that will cover your fixed costs and ultimately generate a profit. With this number, you can also see which products or marketing channels give you the best return for every dollar spent.
💡To better understand contribution margin, let’s look at this example. If your online store sells two items:
Product A: $50 selling price, $30 variable costs, so Contribution margin = $20
Product B: $40 selling price, $32 variable costs, so Contribution margin = $8
Even though both products sell well, Product A contributes more profit toward your fixed costs with each sale.
Understanding break-even point: The equation and its variations
Break-even point formula by units
Break-even point (Units) = Total fixed costs / Contribution margin*
*Contribution margin = sales price per unit - variable costs per unit
Let’s say your e-commerce storefront sells cosmetic items. You have to price each item at $50 to break even for the month. After calculating, you determine your variable costs per unit to be $30, and your total fixed costs are $200. Here’s the break-even point you need to sell to cover both fixed and variable costs: $200/($50 - $30) = 10 items.
Any sales amount that goes beyond this point will contribute directly to profits. If you sell 9 items or fewer, you will suffer a loss.
Break-even point formula by dollar amount
Using the same example above. After calculating your contribution margin per unit to be: $50 - $30 = $20, your break-even point formula in dollar amount will be: $200/($20/$50) = $500.
This means that if your sales are above $500 in the month, it begins to show a profit. Below $500, and you are losing money.
Break-even point formula by ROAS
If you're running ads for your e-commerce store, you can use the break-even formula to figure out your target ROAS (return on ad spend). In simple terms, this formula tells you the minimum return you need from your ads to cover costs and stay in the black.
Here’s how to calculate your break-even point formula by ROAS:
Break-even ROAS = Selling price per unit / (Selling price per unit - Variable costs per unit*)
*Note that advertising costs are still included in variable costs
From the previous example, if you sell your cosmetic items for $50 each, with the variable costs per unit being $30, your break-even ROAS will be: $50 / ($50 - $30) = 2.5.
For every $1 you spend on ads, you must earn at least $2.5 in revenue to avoid losing money. Pay attention that this revenue is before the deduction of fixed costs.
Calculating the break-even point for various products
If you sell more than one product, our break-even analysis becomes more complex. Different products have different costs and margins, making a single-product equation too simple to capture your true financial picture. Instead, you will need to use a weighted average across your entire product mix.
For example, you open another store that sells stationery, with a bundle of three products:
Notebooks that take up 60% of total unit sales
Pencils that take up 30% of total unit sales
Erasers that take up 10% of total unit sales
However, these products have different prices and variable costs per unit:
Notebooks have a price of $120 with $70 variable costs
Pencils have a price of $30 with $15 variable costs
Erasers have a price of $10 with $5 variable costs
In this scenario, the weighted average price per unit would be: (0.6*$120) + (0.3*$30) + (0.1*$10) = $82
At the same time, the weighted average variable costs per unit would be: (0.6*$70) + (0.3*$15) + (0.1*$5) = $47
From this information, we can calculate the total break-even units based on the formula:
Break-even point (units) = Fixed costs / Weighted average contribution margin per unit*
*Weighted average contribution margin per unit = Weighted average price per unit – Weighted average variable cost per unit
If our fixed costs are $500, the break-even units will be: 500/(82-47) = 14.29, which is around 15 units.
Then, you multiply the total break-even units by each product’s sales mix to calculate how many of each you’d need to sell:
Notebooks: 15*60% = 9 units
Pencils: 15*30% = 4.5, round up to 5 units or down to 4 units
Erasers: 15*10% = 1.5, round down to 1 unit or up to 2 units.
To calculate break-even in dollar terms instead of units, the approach is the same, but you'll use a different formula:
Limitations of break-even analysis
Although break-even analysis provides you with valuable insights into your costs, pricing, and profit potential, it still has its limitations:
Marginal costs: The formulas assume your per-unit costs stay the same, but that's rarely true in real life. Supplier prices change, volume pricing kicks in at certain thresholds, and seasonal factors can affect costs unexpectedly.
Product variety: Break-even analysis becomes more complex when you offer multiple SKUs with different prices and variable costs. While you can still use the weighted average formula, managing it manually gets overwhelming quickly. And here's the catch: your calculations assume a stable sales mix. If customers suddenly favor one product over another, your entire break-even point shifts, and you're back to square one.
Price cannibalization: This phenomenon happens when one product decreases sales of another product. For instance, if you heavily discount pencils, customers might buy only cheap pencils instead of your higher-margin notebooks. Break-even analysis typically assumes that product sales are independent, so it doesn’t account for these cross-product effects or shifts in customer demand caused by pricing changes.
5 common mistakes when calculating the break-even point
When it comes to planning for the break-even point, many e-commerce merchants have made critical errors in their calculations that lead to mispriced products and vanishing profit margins.
Here are five common break-even calculation errors that make sure you get it right:
Forgetting hidden costs: Most people forget to include their hidden costs. Think about payment processing fees, currency conversion fees, and chargeback fees.
Using imaginary ad costs: If you just start running ads, don’t just estimate your CPA or ROAS numbers. In reality, your actual costs will likely be much higher, especially during those first few weeks while algorithms learn. Instead, observe and monitor your actual early performance, and adjust your break-even numbers as your campaigns mature.
Not updating calculations: Most of your variables, even fixed prices, will change. If you don't update your break-even point after these changes, you will make decisions with outdated numbers. That’s why you should consider using a spreadsheet or tool that automatically updates your break-even point when things change. It saves time and keeps your numbers accurate.
Ignoring cross-product dynamics: When you sell multiple products, each has different costs and profit margins. The mistake? Assuming they operate independently. In reality, the pricing of one product can impact the sales of another. For instance, a discount on Product A might draw customers away from higher-margin Product B, disrupting your entire break-even calculation.
Not separating break-even by traffic source: If you use multiple channels to run ad campaigns, make sure to track break-even CPA or ROAS separately for each channel. Label the link properly using UTM tags and track each channel's performance in a dashboard so you can monitor break-even metrics at a glance.
How to optimize and monitor your ROAS and break-even point
The fundamental behind optimizing the break-even point is simple: you either lower your fixed costs or increase your margin.
For e-commerce site owners and dropshippers, learning how to optimize Return on Ad Spend (ROAS) is crucial. Since ad campaigns are the most reliable way to get new customers, optimizing this metric will result in higher profits from every marketing campaign.
Here’s how to get the best returns and the lowest break-even point for you:
Improve your audience targeting
Customers want ads that are personalized for them. Start by creating detailed customer personas based on your best existing customers. Use creatives and ad copy that speak directly to their needs and preferences.
Once you're driving traffic, leverage retargeting to focus on users who've already shown interest. Think about those who visited your site, viewed products, or added items to their cart but didn't buy. These warm audiences convert at much higher rates than cold traffic, often at a fraction of the cost, making them essential for hitting profitable ROAS targets.
Optimize your landing page
After your potential customers have clicked on your ads, it is now the landing page that will make or break your sales profit. Optimizing your landing pages can boost your chances of conversions and enhance the sales funnel.
There are two factors that need to be fixed before any optimization happens:
Page speed: According to Cloudflare, 47% of customers expect a webpage to load in 2 seconds or less. That said, a fast-loading page has a significant impact on your bottom line. Compressing all product images, minifying CSS/JavaScript, and using fast hosting are some of the practices to increase page speed.
Message match: When customers click on an ad, they expect a solution to their problems. If your landing page doesn't deliver on what the ad promised, they'll leave immediately. Make sure your headline, offer, and visuals align with your ad copy
To increase click-through rate (CTR) on a landing page, e-commerce merchants should:
Build trust and urgency: You can include widgets such as social proof, countdown timers, or even user-generated content to strengthen credibility and create a sense of urgency around your offer.
Make the site responsive: According to Outerbox, mobile traffic now makes up over 70% of all eCommerce traffic. So don’t forget to make your site mobile-friendly.
Focus on benefits: E-commerce merchants often make the critical mistake of listing all the features their product has. However, it is the value that the products bring to customers that makes them buy. Transform every feature into a tangible benefit that shows how the product improves your customers' lives.
Continue monitoring and A/B testing
Many merchants will use different channels to attract and connect with customers. But it is best to know the specific purpose of each one, rather than treat them as isolated entities. Track separate metrics for acquisition channels (like social ads) versus retention channels (like email) to understand which investments drive you toward break-even and which need adjustment.
While you run your ad campaigns, you may encounter ad sets or keywords that have spent a significant amount of budget but are performing poorly. In this case, don’t hesitate to pause them to eliminate wasted spend and lower your cost of ads.
If you have good ideas on visuals or copy, validate them using A/B testing. Try different headlines, images, or calls-to-action to see which one is the winner. Even a small improvement in conversion rate can significantly lower your break-even point.
Track the results, keep what works, and ditch what doesn't.
Conclusion
Whether you are a dropshipper, an e-commerce store owner, or just simply have a store as a side hustle, knowing the break-even point should always be at the top of mind. It acts as a compass that shows how close you are to profitability and where to focus your optimization efforts
Start by gathering all the numbers you need. Then, calculate your break-even point using the formulas we've covered. Remember, include all costs (especially the hidden ones), use realistic projections, and update your calculations as your business evolves. From there, focus on optimization. Better audience targeting, faster landing pages, and continuous A/B testing can all reduce your break-even point and improve your return.
The path to profitability starts with knowing your numbers. Now you have the tools—use them to build a business that doesn't just survive, but thrives.
FAQs
Harry Nguyen
Digital Marketing Specialist at Qikify
Hi, I’m Harry, your friendly neighborhood marketer at Qikify. I am all about providing E-commerce merchants like you with the best insights and industry tips to help you grow your online stores and drive more sales.
Out of office, I like working out at a gym and learning about all things E-commerce and Marketing.
Feel free to reach out to me on LinkedIn. I’m always up for a coffee chat with other marketing folks and store owners to exchange ideas and explore potential collaborations.
TABLE OF CONTENT
- Break-even point: Definition and why it matters
- What goes into the break-even analysis formula?
- Understanding break-even point: The equation and its variations
- Calculating the break-even point for various products
- Limitations of break-even analysis
- 5 common mistakes when calculating the break-even point
- How to optimize and monitor your ROAS and break-even point
- Conclusion
- FAQs
