Why break-even pricing matters
Break-even analysis tells you how much volume you need to cover fixed costs at a given price and variable cost. It's the fastest way to sanity-check whether a pricing model can work at expected demand.
Key formulas
- Contribution per unit = price - variable cost per unit.
- Break-even units = fixed costs / contribution per unit.
- Profit = units * contribution per unit - fixed costs.
What to include in variable costs
- Payment processing fees, shipping, returns/refunds (ecommerce).
- Support or delivery costs that scale with usage (SaaS infrastructure, success).
- Any cost that rises with each additional unit/customer/order.
Common mistakes
- Mixing time windows (monthly fixed costs with annual unit volumes).
- Ignoring step costs (capacity constraints can make 'fixed' costs jump).
- Treating break-even as success; you usually need buffer margin and profit.