Definition
Break-even revenue is the revenue required to cover your fixed costs given your gross margin. It's a quick way to understand the minimum revenue needed to avoid losses.
Formula
Break-even revenue = fixed costs / gross margin
Step-by-step (how to model it)
- List fixed costs for the period (rent, core salaries, base tools, minimum infrastructure).
- Pick a margin definition: gross margin or contribution margin (be explicit).
- Convert margin to a decimal (40% -> 0.40).
- Compute break-even revenue and compare to your realistic demand capacity.
- Run scenarios: margin moves and cost moves are often more important than the exact base case.
Break-even revenue vs break-even units
Revenue break-even works well when you have one main product and a stable margin. If you have multiple products or a variable mix, it can be more accurate to model break-even units (or break-even customers) by tier.
What margin should you use-
- Gross margin is common when COGS is the primary variable cost (many SaaS models).
- Contribution margin is better when variable fees, shipping/returns, or channel costs are meaningful.
- Do not use net margin in the break-even formula; net margin already includes fixed costs and will double-count them.
Sensitivity table (why small changes matter)
| Fixed costs | Margin | Break-even revenue |
|---|---|---|
| $50,000/mo | 30% | $166,667/mo |
| $50,000/mo | 40% | $125,000/mo |
| $60,000/mo | 40% | $150,000/mo |
Common pitfalls
- Using net margin instead of gross/contribution margin.
- Forgetting overhead items that are effectively fixed (core tools, base salaries).
- Not updating the model after pricing or COGS changes.
- Mixing time units (monthly costs with annual revenue).
- Assuming the margin is constant across growth (costs can scale and change).
How to improve break-even
- Increase gross margin (reduce COGS, improve infrastructure efficiency).
- Increase prices or move customers to higher tiers where value supports it.
- Reduce fixed costs carefully (avoid harming retention or delivery).
- Reduce refund/return leakage and payment fees (often hidden margin killers).
- Improve conversion so fixed costs are spread over more revenue.