Definition (canonical)
The break-even point is the sales level at which revenue covers all costs — below it every period deepens the loss, above it every additional sale is profit: `break-even (units) = fixed costs ÷ contribution margin per unit`, where contribution margin = price − variable cost.
The worked example
A workshop: fixed costs (rent, salaries, insurance, software) 30,000/month; product sells at 200 with variable costs (materials, packaging, payment fees, commission) of 80. Contribution margin = 120. Break-even = 30,000 ÷ 120 = 250 units/month — or in revenue terms 50,000 (fixed ÷ margin ratio of 60%). Unit 251 is where profit begins. The same skeleton scales to services (billable hours as units) and subscriptions (subscribers needed = fixed ÷ contribution per subscriber) — the discipline is in HONEST cost classification: anything that grows with volume is variable, even when the invoice looks fixed.
What the number is for — four decisions
Viability check: if break-even exceeds realistic market capture, the model is dead on paper — cheaper to learn now. Pricing sensitivity: recompute break-even at price ±10% and watch the leverage (pricing decisions get sober fast). Margin of safety: (current sales − break-even) ÷ current sales — at 10% you're one bad month from losses; at 40% you can experiment. Operating leverage: high-fixed-cost businesses (software, manufacturing) have distant break-evens and explosive profits beyond them; high-variable models (trading, services) break even early and scale linearly — know which physics you're in before copying anyone's playbook.
The honest limits
Break-even is a model with assumptions that reality bends: costs aren't cleanly fixed-or-variable (stepped costs jump — the next hire, the bigger warehouse), price and mix shift with volume, and multi-product companies need per-line contribution or a weighted blend. Two upgrades worth making: cash break-even (exclude non-cash costs like depreciation; add debt principal — closer to survival math and to cash-flow reality) and target-profit point (fixed + required profit in the numerator) — because the goal was never zero.
FAQ
Break-even in time? Divide the gap by monthly ramp: needing 250 units while adding 25/month of net new run-rate puts break-even ~10 months out — burn until then must be funded.
Where do founder salaries go? In fixed costs, at market rate — a model that only works with unpaid founders doesn't work.
Is lower break-even always better? Lower is safer, not automatically better — outsourcing everything lowers the point and caps the margin; it's a risk-return dial, not a score.
Related: Margin · Unit Economics · Cash Flow · Pricing Reviewed: 2026-07-16 · Sources: managerial accounting canon