Beyond the Break-Even Point: what are break-even analysis, yield, and price?

If you've read our last article, you'll know all about the basics of breaking even, and a little bit about what it can do for your business. (If you haven't – go and take a quick look! This article is part two.) But what if you could plan even smarter, using the concept of breaking even in a new way?

In this post, we'll explain related 'breaking even' terms: break-even analysis, yield, and price. These three concepts go beyond the break-even point and help guide your e-commerce business decisions.

And don't worry, we're keeping it simple and accessible! You don't need to be an expert in finance to understand this handy guide.

What is 'break-even analysis'?

We touched on this in the last article, with an example calculation using the candle business. A break-even analysis is essentially calculating when you'll be able to cover all of your costs.

Here's an example: imagine you're running an online health foods store selling bags of trail mix. Each bag costs £4 to make. You want to sell them for £6. A break-even analysis will help you decide if this pricing is feasible, how you could cut costs to make it work, and how many units you need to sell to make enough profit.

Fixed costs, variable costs, and selling prices all play a role in breaking even. A break-even analysis can help you decide whether a new product is worth the effort to set up – will it pay off or just be a drain on your budget?

What is 'break-even yield'?

Break-even yield is the minimum number of sales needed to cover the costs of production. Using the above example, let’s say the fixed costs of making the trail mix are £1,000 (from renting a kitchen, hosting a website, and so on). You need to sell enough bags of trail mix to break even: since you’re making an extra £2 per bag, you’ll need to sell 500 of them to break even.

Break-even yield (in bags) = fixed costs / (selling price - variable costs)

= 1000 / (6 - 4) 

= 1000 / 2

= 500 (bags of trail mix sold to break even)

The concept of break-even yield can be really useful when planning your inventory for the next sales period. You need enough inventory to cover costs, but you don't want to spend money on extra products that might not sell. So, in the trail mix example, you might have a minimum order of ~500 bags' worth of ingredients to ensure you can break even.

What is ‘break-even price’?

Break-even price is the lowest price you can sell a product without making a loss. Imagine it costs £10 to make a bottle of quality apple juice. If you sell this bottle for £10, then you break even. If you can make a whole lot of apple juice with £10, you can sell several bottles for a lower price, and still break even.

Essentially, break-even pricing is in your favour when you can make a lot of goods at an affordable overhead price.

Knowing your break-even price will help you to set competitive prices without making a loss. This is extremely useful when competing with retailers or large businesses, and it can give your company an edge, especially when you’re selling quality goods. You also have greater flexibility when lowering prices for sales – you know how far you can discount your products while still making a profit.

How does 'breaking even' help my e-commerce business?

Break-even concepts can be really useful when breaking down each aspect of sales into detail.

• Using a break-even analysis helps you test the earning potential of a new product. You can see if it's a worthwhile investment or better off in the discard pile.
• Break-even yield means you can tailor your inventory numbers to your business’ needs. You can order close to the minimum necessary to break even, instead of ordering too much stock and getting in a mess (check out our inventory management article on what to do if this happens!)
• Knowing your break-even price helps you check if your prices are sustainable. It means you can adjust your current prices without making a loss, even when competition is high or sales are on.

In conclusion, understanding the concept of breaking even in greater depth means you can make smarter decisions to help your business thrive.

Breaking even doesn’t need to be complicated. It's explained here so you too can understand. We believe tips and tricks for good finances should be accessible, clear and simple. Without unnecessary jargon.

And that's why we've designed CloudFO, to take care of the financial side of your business. CloudFO is designed to answer your questions in simple language, breaking down complex business and financial terms so that anyone can understand, not just experts in finance. Our AI powered CFO comes equipped with interactive weekly reviews, detailed monthly reports, seamless integration with your Shopify storefront and major banking apps, and many more useful features to help you achieve the best result for your business.

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