Break-even analysis: The #1 reason most eCommerce businesses fail to scale
When starting a new business, simply breaking even isn’t your end goal. You want to make a profit. This isn't an easy journey with 9 out of 10 e-Commerce businesses failing within the first 4 months. In a survey of 1,253 owners of failed UK start-ups by MarketingSignals, two of the top five reasons for failure included running out of cash (32%) and price or costing issues (29%).
So breaking even is an important milestone for every eCommerce business aim for, and to celebrate. Knowing your break-even point helps you plan for your future. And a break-even analysis is your key to mapping out your business’ pricing strategy that will get you there.
What is a break-even analysis?
A break-even analysis is a tool that business owners can use to determine at what point their business will break even, and start to become profitable. It’s a formula you can use to determine your total fixed business costs and the amount of stock you need to sell or income goal you need to hit to cover these business costs completely.
And while your break-even point will be determined by this formula, the work that goes into reaching this number is invaluable to understanding your business’ financials.
Why a break-even analysis is critical for eCommerce businesses
It helps you set clear, logical goals
You’re dealing with unit volumes, so it helps you see exactly what costs go into each unit of your stock, and how many units you need to sell each month to cover your operating costs. Using these figures, you can create a clear pricing strategy for your products, and identify where you need to change your sales tactics.
You’ll then know how to set your sales targets and what you’re able to safely spend on acquisition so that you can build a profitable business.
You’ll make smarter plans for the future
Performing a break-even analysis can help you determine if a new sales avenue is going to be profitable. You’ll be able to get peace of mind when migrating all your Amazon sales to your own central website or determine whether it’s worth the time and effort attending sales events or operating a short-term pop-up location.
It also helps you reduce potential business risk. By undertaking a break-even analysis before launching a new product, or pursuing a new business opportunity, you’ll be able to easily tell if it’s unlikely to be profitable, and you can avoid sinking your time and money into something that ultimately won’t work out.
And from a growth point of view, it provides you with a tangible tool you can use when applying for finance, or enticing investors. By providing a clear break-even point for your business, you can demonstrate that you’ve mapped out your business’ cashflow and are planning for the future.
Ready to work out your break-even point now? Download our free breakeven calculator by clicking the button below.
How to perform a break-even analysis
To calculate break-even point based on units, divide your total fixed costs by the sale price per unit minus the variable cost per unit (margin).
In order to find the break-even point accurately, you first need to determine your business’ fixed costs and variable costs.
What is a fixed cost?
These are the costs that your business must pay each month, or year. They’re the costs that remain roughly the same, regardless of your business’ income.
This covers things like your rent or a mortgage, insurance, utility costs, product storage costs, and software subscriptions. Essentially, it’s what you spend on your business, rather than producing your stock. If you're using our break-even template, fill out your business fixed costs in the currency you're charged into the table marked Step 1, just like below.
What is a variable cost?
Variable costs are the individual costs that go into making or selling one unit of your stock, which are subject to change for any reason.
Say, for example, you sell something like magnetic bottle openers painted in football team colours, that you source from Vietnam. You’ve got your individual costs for the materials. There are costs for labour to paint them. There are costs for packaging, postage, and even payment processing fees for transferring money internationally to your supplier.
Add these into the Variable Costs table within your break-even analysis tool to find your break-even point.
How to calculate your break-even point
Now that you've determined your fixed and variable costs, its time to calculator your break-even point in units. This is the magic number of how many units you need to sell in a given period, in this case, a month, in order to break even.
To calculate your unit break-even point, divide your total fixed costs by your sale price minus your variable costs to land at your break-even number.
Example: Break-even units
You sell your magnetic bottle openers for $15 each. Sourcing, labour, packaging, posting, and everything else comes to $10 per item.
Your total fixed costs for your storage space, office rent, subscriptions to your creative tools, and your utilities, comes to $1,700.
Example: Break-even point in sales dollars
This follows a similar process, but involves the product’s contribution margin in your calculations.
The contribution margin is the percentage of your product’s sales cost that’s left after all the product costs are paid for—so the percentage of the sales price that contributes to your profit.
Our free break-even tool can calculate all this for you automatically. Click the Try now button below to get your free copy.
2 levers for improving your unit economics
The seemingly obvious way to lower your break-even point is to raise the prices of your product.
But it’s not that easy. Customers are sensitive to price increases. They don’t like change. This can backfire, and cause a drop in your customer base.
So if this method looks like it could price you out of the market, it’s better to look at your costs instead.
1. Lower your fixed costs
You’ve mapped out all your fixed costs, so now find the unnecessary ones that you can remove.
It might be looking at better-priced storage options, finding a cheaper internet provider, or seeing if you can negotiate a rent reduction. It might mean stopping spending on some aspects altogether.
Or, it can be as simple as switching from a bank account with a monthly fee to a fee-free account.
This is where Airwallex can help you out. You pay no fees on your business accounts, ever -and you can open global accounts in 11 currencies, so you won’t have to pay international transfer fees either. This one easy change means you can permanently reduce banking costs for your business.
It might sound small, but these add up quickly.
2. Lower your variable costs
Lowering your variable takes a little more effort.
It can include searching for suppliers who offer more competitive rates on your stock, or offer better bulk rates. You may be able to find a production plant with cheaper labour costs, or a courier that offers better prices.
You could streamline your processes. Perhaps your packaging doesn’t need that added layer of wrapping, or you might stop including bonus stickers and postcards in all your packages.
Another way is looking at the fees you pay on your banking. For example, if you source your products internationally, you’re likely paying international transaction fees.
Both Airwallex Multi Currency Cards and Foreign Currency Accounts help you cut out international transaction fees altogether. You’ll also receive a foreign exchange rate that’s up to 90% better than what any of the big banks can offer.
You’ll be able to reduce your spending costs, reduce your fees, and lower your break-even point all at the same time.
Airwallex is the smarter way to do your business banking
Now that you understand your business’ break-even point, it’s time to start making it as cost-effective as possible.
So if you’re looking to reduce your expenses, get the best price on your international payments, and say goodbye to bank fees for good, get in touch with Airwallex today. You can book a free online demo with a product specialist by clicking here to find a timeslot that suits you.
Related article: How to Calculate ROI: It’s Not as Hard as You Think
Joe Romeo is responsible for scaling our Airwallex's product adoption in the UK and the world. An all-around growth enthusiast, Joe's speciality lies in SEO, organic acquisition and making lasagna.
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