Join Drew Boyd for an in-depth discussion in this video Calculating break-even points, part of Marketing Foundations.
Imagine you create a new promotional program that's going to cost $50,000. Should you spend it? Will you generate enough new sales to at least cover this cost? Because if you don't, you're wasting money. As a marketer, you need to be able to make these types of decisions and you do that with a tool called the break-even analysis. It allows you to estimate how many units of a product you need to sell in order to break even, assuming a given price and cost structure for the product.
That amount is called the break even point. If you sell less than that, you lose money,. But every unit sold over that is making you a profit. Here's the formula for break-even analysis. Break-even point equals fixed cost divided by unit selling price minus variable costs. This part with in the parentheses is also called the contribution margin. It's how much net cash you pocket after paying the variable costs of a product.
Let's do an example. Imagine you're selling men's wallets. You want to promote one of your wallets that sells for $89. To manufacture and sell the product, you have to spend $29 per wallet on things like labor, materials and sales commissions. If you want to spend $50,000 on that promotional program, your break-even point is calculated as follows. Our spending amount is $50,000. We subtract $89 minus $29, giving us a $60 contribution margin.
We divide $50,000 by $60 to give us 834 units, which is our break-even point. So what, you might ask. Well, the first question you ask is, will this promotion program generate at least 834 units of new sales? That means incremental. Over and above what you're already selling. If not, don't do the program, unless you can figure out how to change the promotional program so that it's more effective.
Now, keep in mind that your sales objective is to sell a lot more than just the 834 units to break even. And this is where your cross-functional marketing planning team can help. Especially your finance partner. They'll help you with forecasting and estimating the contribution margin. Now, there's always risk in running a marketing program, but you'll make better and smarter decisions about your marketing budget with this handy little tool called break-even analysis.
You'll also learn to address tactical challenges and present the plan to get buy-in throughout an organization, from the C-suite to the sales team, as well as use the marketing plan to guide outside agencies and vendors. Finally, you'll learn how to launch the campaign and measure its performance.
- Marketing in an organization
- Assembling the team
- Creating the marketing plan
- Analyzing your products, customers, and market
- Segmenting customers
- Creating a value proposition
- Developing a strategy
- Setting goals
- Setting prices
- Using social media
- Presenting your plan to leadership
- Budgeting your plan
- Measuring success