How many units must I sell each month to cover my fixed costs?

Every month there is a number you must cross before your store makes a rupee of real profit. That number is your break-even point in units, and the arithmetic behind it is simple enough to do on your phone calculator.

The formula

Break-even units = monthly fixed costs divided by contribution per unit.

Contribution per unit is the selling price minus the costs that come with each unit, such as product cost, shipping, packing and payment fee. If you have not worked this out yet, start with how to calculate how much each order contributes, because everything here depends on it.

Which costs are fixed?

Fixed costs are the ones you pay even in a month with zero sales. For a small home brand they typically include:

• Store subscription or domain
• Rent for a shop or a share of home rent used for storage
• A helper's or tailor's fixed salary
• Phone and internet used for the business
• Any monthly software or accounting fee

Add them up honestly. Leave out your own salary only if you are knowingly working for free, and say so to yourself.

A worked example

Say your fixed costs come to Rs 20,000 a month, and each unit of your product contributes Rs 250 after all unit-linked costs (illustrative numbers).

20,000 divided by 250 = 80 units.

So you need to sell 80 units each month just to cover fixed costs. The 80th unit is the one where the month turns from loss into profit.

What happens above and below it

Let us test two months.

• At 60 units, contribution is 60 x 250 = Rs 15,000. Fixed costs are Rs 20,000. You are Rs 5,000 short.
• At 100 units, contribution is 100 x 250 = Rs 25,000. After fixed costs of Rs 20,000, you keep Rs 5,000.

Notice something useful. Twenty units either way flips the month by Rs 5,000 on each side. Once you pass break-even, every extra unit adds its full Rs 250 to profit. Before break-even, every unit is only shrinking the gap.

Turning the number into a daily target

80 units a month is roughly 2 or 3 units a day. That sounds far less scary than Rs 20,000. It also helps you plan.

• If your weekly sales are far below 20 units, you know early in the month that you are heading for a loss.
• If you run a drop with a fixed launch window, you can check whether the drop alone clears the target. See what is a drop and why small brands love them.

Three ways to bring the number down

• Raise contribution, by adjusting price or trimming shipping and packing costs. If contribution rose from Rs 250 to Rs 300, break-even would drop from 80 to about 67 units.
• Cut or share fixed costs. A rented shop that is mostly storage could often be replaced with a smaller space.
• Sell a higher-contribution product more often. If you have a bundle that contributes Rs 400, push it.

Limits of this method

This calculation assumes one product with one contribution figure. If you sell many products, use an average contribution across your typical order mix, or do the calculation for your best-selling item first. It also leaves out ad spend, which is fixed in a month but behaves differently. The next step, covered in break-even orders including ad spend, adds ads to the picture.

Do this exercise once a quarter. Costs creep, and a break-even that was 80 units in January can quietly become 95 by June if your courier or supplier raised rates.