What is the Break-even Point?
The break-even point is a financial indicator where the expenses of a company are equal to its profit. It highlights a situation where a company has no gain or loss. This indicator is used in every aspect of business where expenses are involved. It is commonly referred to as BEP, and inflection points follow these in business.
Significance of Break-even Point in an E-commerce Shipping and Delivery
The break-even point allows a business to analyze and determine the profitability of certain operations in its organization. It also helps a company to come up with a pricing strategy.
- Service optimization: A company can analyze its current services and determine profitability. Using such a strategy, one can replace underperforming services with profitable ones.
- Goal setting: Once a break-even point has been identified, a company can use it as a monthly baseline for its sales targets, as a minimum. Later on, it can be succeeded by loftier sales targets.
- Competitive pricing: A merchant can use industry benchmarking tests and compare them with the break-even point. It will allow them to set them to create competitive pricing within the industry.
Prerequisites of Break-even Point and How It Works
A company must compute a unit’s contribution margin by using its pre-determined variable costs and sales costs. Once the mentioned units are used to calculate the contribution margin, a seller can use the break-even point formula below.
Break-even point (BEP) formula: Fixed cost / Contribution margin, where contribution margin is computed by deducting the variable costs from the sales cost.
The BEP can then be used to analyze and determine the profitability of certain services and create set sales targets that can break the mentioned stalemate.
Use Case with Break-even Point
A clothing e-commerce brand in Australia wanted to start advertising online. To set a return-on-investment baseline target, the company used its break-even point. As the company’s profit margin was 20% per unit, the break-even ROI was determined to be 5X. Therefore, a 5X ROI was selected for the new service as the minimum return from marketing the company had to focus on.