Break-even point explained, with a small shop example
Your break-even point is the number of sales a month at which you stop losing money. It is one division, but only if you split your costs the right way first. Here it is worked through on a small shop.
The two kinds of cost
- Fixed costs stay the same whether you sell one item or a hundred: rent, software, insurance, advertising you pay for regardless, and your own pay if the business has to support you.
- Variable costs grow with every sale: materials, packaging, payment and platform fees, postage you pay for.
What a sale leaves over after its variable costs is the contribution. It is the amount each sale puts towards the fixed costs, and the break-even point is where those contributions add up to the fixed costs exactly.
Break-even sales = fixed costs ÷ contribution per sale
A small shop, step by step
Imagine a small shop that sells handmade leather bags at $250 each. Monthly fixed costs:
- Studio rent$1,200
- Your own pay$2,500
- Software$150
- Insurance$100
- Advertising$600
- Everything else$450
- Fixed costs per month$5,000
Each bag costs $60 in materials, $8 in packaging and about $22 in payment and platform fees, so $90 of variable cost.
- Price$250
- Variable cost per bag− $90
- Contribution per bag$160
$5,000 ÷ $160 = 31.25 bags a month. You cannot sell a quarter of a bag, so round up to 32. Check: 31 bags leave $4,960, which is $40 short. 32 leave $5,120, which is $120 over. In revenue terms that is about $7,813 a month (31.25 × $250).
What moves the break-even point
Change one thing at a time on the same shop:
- As above32 sales
- Raise the price to $275 (contribution $185)28 sales
- Cut variable cost to $80 (contribution $170)30 sales
- Cut fixed costs to $4,00025 sales
A $25 price rise removes four sales from the target. Fixed costs are the other big lever, but they are usually the hardest to cut. Selling more is not on this list because it does not change the break-even point, it only helps you reach it.
How far above it are you?
Break-even is where you stop losing money, not where the business is doing well. What matters is the gap between it and your real volume. Suppose the shop sells 45 bags a month:
- 45 × $160 contribution$7,200
- Fixed costs− $5,000
- Profit after your own pay$2,200
Sales can fall by about 31% before the shop starts to lose money, because 31.25 is 31% below 45. That cushion is called the margin of safety. A month with 20 sales, in contrast, loses $1,800.
You can run it the other way too. To make a $2,000 profit on top of everything, divide fixed costs plus the profit you want by the contribution: $7,000 ÷ $160 = 43.75, so 44 bags.
Mistakes that make the answer wrong
- Leaving your own pay out of the fixed costs. Without it the shop only appears to work because you are not being paid.
- Counting a variable cost as fixed, or the other way round. Fees and materials scale with sales, so they belong in the contribution.
- Using the list price for everything. If you discount, or sell several products, use the average price and the average variable cost across your real mix.
- Treating break-even as the goal. It is the floor. A shop that sits right on it is one bad month away from losing money.
Try it with your own numbers
The Small Business Break-Even Calculator does the division for you: enter monthly fixed costs, your average price and your variable cost per sale. If you are not sure the price itself is right, how to price Etsy products without losing money works through that side, and the Small Business Finance Kit covers margin and runway.
This is a planning estimate, not accounting or financial advice. Your own books are the authority.
