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Calculate Break-even and then Lower It

Calculate Break-even and then Lower It

Every business has a break-even for their product line.  The break-even point (BEP) is the point at which cost or expenses and revenue are equal: there is no net loss or gain, and one has "broken even".  By lowering your break-even volume, you can increase your return on investment (ROI).  Here are some tips to help lower your break-even point. 

 

The break-even point is calculated as follows:

 

Break-even volume = Fixed Costs / (Contribution Per Unit) 

 

There are a few ways you can lower your Break-even Point:

 

  1. Upsell and Cross-sell
  2. Lower Fixed Costs
  3. Raise Your Prices

 

Upsell / Cross-sell

A creative way to convince your customers to purchase more is to bundle your products or services.  This will raise the average profitability of a customer and lower the number of customers you need to break-even.  If you attractively price a bundle of your products or services it could really increase your average dollar sale per customer.  

 

Many wireless service providers sell “cross-product bundles” when they provide voicemail services packaged with their airtime minutes. This makes the purchase decision easier for consumers, but it also blurs the comparison of whether the bundle is a good deal. I find it harder to compare the costs of the services I get to an alternative.

 

Another example is “quantity bundling” the “baker’s dozen” gives thirteen donuts for the price of twelve.  This is an attractive way to get the consumer to buy more with providing a slight discount. 

 

Lower or Remove Fixed Costs

Fixed costs tend to be time-related, such as salaries or rents being paid per month.  Fixed costs are expenses that do not change as a function of the activity of a business.  So how can we lower them?  You can hire temporary workers and convert salary workers to hourly.  Lease your office space rather than buying it or better yet move to a property with lower rent then you currently pay.  You can also increase bonus tied to sales and lower base salaries. 

 

Raise your Prices

Everyone is always scared of raising your prices.  Many business owners are scared to loose their current customers due to the price increase.  The truth is that most customers don't even say a thing and others are wondering why you didn't increase your prices sooner.  Most of employees get a annual cost of living increase.  Why can you do the same by increasing your prices.  If you raise your prices you increase the price per unit, which lowers the number of units required to break-even.

 

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