How to Calculate Break-Even for a Small Online Business
The break-even point is the level of sales at which your business covers all its costs, so that profit is exactly zero. Below it you are losing money; above it you are making a profit. Knowing your break-even point helps you set realistic sales goals, decide whether a new product, subscription or advertising campaign is worth it, and price with confidence. The maths is simple once you separate your costs correctly. This guide walks through it with an example from a small online shop.
Step 1: Separate fixed and variable costs
Fixed costs stay the same each month regardless of how many orders you get. For a small online business these might include:
- Platform subscriptions, such as an online store plan or a paid marketplace upgrade
- Software, apps and website hosting
- Studio or storage rent, and a share of utilities and phone
- Equipment repayments and insurance
- Any fixed salary you pay yourself or others
Variable costs rise with every order. Typical ones are:
- Materials and packaging for each item
- Postage you pay
- Marketplace and payment processing fees, which are charged per sale
- Labour paid per piece, if you pay for making by the item
Some costs are a bit of both. Advertising with a fixed monthly budget is a fixed cost; advertising charged per sale, such as a commission on attributed orders, is variable. Decide which bucket each belongs in and be consistent.
Step 2: Work out the contribution per order
The contribution of an order is what is left after its variable costs. It is the amount each order "contributes" towards paying your fixed costs, and then towards profit.
Contribution per order = selling price − variable costs per order
Example: a US Etsy seller sells a bag for USD 50 plus USD 10 shipping, so the order total is USD 60. Variable costs per order are:
- Materials and packaging: 15.00
- Postage label: 8.00
- Etsy fees (listing 0.20, transaction 3.90, processing 2.05): 6.15
Total variable costs: 29.15. Contribution per order: 60 − 29.15 = USD 30.85. You can find the exact fees for your own price and country with our Etsy fee calculator.
Step 3: Divide fixed costs by contribution
Break-even orders = fixed costs ÷ contribution per order
If the shop's fixed costs are USD 150 a month, the break-even point is 150 ÷ 30.85 ≈ 4.9. Because you cannot sell part of an order, round up: the shop needs 5 orders a month to break even. Every order after the fifth adds about USD 30.85 of profit.
Break-even in revenue
Sometimes it is more useful to know the sales value you need. First find the contribution margin ratio: contribution ÷ price. Here, 30.85 ÷ 60 ≈ 0.514, or 51.4%. Then:
Break-even revenue = fixed costs ÷ contribution margin ratio
150 ÷ 0.514 ≈ USD 292 of sales a month. This version works well for shops with many products at different prices, as long as the mix of products stays roughly similar.
Per-item break-even price
A different but related question is: what is the lowest price at which a single item stops losing money? This ignores fixed costs and asks only whether the sale covers its own variable costs, including fees that change with the price. In the example, with USD 10 shipping charged, USD 15 cost of goods and USD 8 postage, the Etsy item price at which profit is zero is about USD 15.91. That figure is the absolute floor for a discount or sale. Our Etsy calculator shows it as the "break-even item price", and our sale and discount calculator shows how close a discount brings you to it.
Using break-even to make decisions
Should I take on a new monthly cost?
Divide the new monthly cost by your contribution per order. If a tool costs USD 30 a month and each order contributes about 30.85, it needs to bring in roughly one extra order a month to pay for itself. That is an easy test for any subscription.
What happens if I raise my price?
Raising the price increases contribution per order and lowers the break-even point. In the example, raising the item price from 50 to 55 adds 5 to the order total, but fees also rise slightly. Recalculate contribution with the new fees and divide again. You will usually find you need fewer orders, which is why small price rises can matter more than they seem.
What does a sale do?
A discount reduces contribution per order, so you need more orders to cover the same fixed costs. A 20% discount on the item price in the example cuts the order total to 50 and reduces fees a little, but contribution falls by much more than 20%. Check the new break-even before you commit.
What about advertising?
For a fixed ad budget, add it to fixed costs and see how many extra orders you need. For commission-style ads charged on attributed sales, include the commission as a variable cost on those orders. Etsy's Offsite Ads fee is an example of this type.
Common mistakes
- Leaving out your own pay. If you want to earn a set amount each month, include it in fixed costs. Otherwise "break-even" means working for free.
- Forgetting fees. Marketplace and payment fees are variable costs and can easily be 10% or more of an order.
- Using average prices that hide low-margin products. If some products barely cover their own costs, look at them separately.
- Calculating once and never again. Material costs, postage and fees change. Recalculate when they do.
A quick template
- List monthly fixed costs and total them.
- For a typical order, list variable costs: materials, packaging, postage and fees.
- Contribution = order total − variable costs.
- Break-even orders = fixed costs ÷ contribution, rounded up.
- Break-even revenue = fixed costs ÷ (contribution ÷ order total).
Our percentage calculator is handy for the margin ratio step, and the product pricing calculator helps you build up the cost per item.
Sources
This guide is general information for sellers and is not financial, tax or legal advice. Marketplace rules and fees change, so always confirm in your own seller account. DailyToolLab is not affiliated with Etsy Inc., Shopify Inc. or eBay Inc.