How to run a break even analysis for your ecommerce business
Vaishali Ravi
·June 12, 2024
When you’re launching a business, it’s important to invest in building an ecosystem that can help you grow your brand, including the right technologies, human resources, equipment, and marketing strategies.
But if you’re ramping up your spending with the blind hope that all your efforts will pay off, it’s time to take a step back and start crunching numbers.
To make sure that you’re making smart investments, you should regularly assess your business’ financial health. One tool that can help you do this is a break even analysis. This useful technique allows you to determine the point at which your business will become profitable by calculating the number of sales or units needed to cover all your expenses.
How do you conduct a break even analysis?
To conduct a break even analysis for your ecommerce business, follow these simple steps.
Start by collecting all relevant financial data from your business, including fixed costs (such as rent, utilities, and salaries), variable costs (such as production or shipping costs), and expected revenue. Using the formula: Break Even Point = Fixed Costs / (Unit Selling Price – Variable Costs), calculate the number of units or sales needed to break even.
Next, compare your break even point to your projected sales and determine if it is a realistic and attainable goal. This step will help you make informed decisions about pricing, production, and marketing strategies.
Using your break even analysis to inform your business strategy
In some cases, your break even analysis may help you realise that you’ll need to sell a lot more product than you thought to break even. So what now?
Here are some potential strategies you might want to evaluate:
Raise prices
The easiest way to break even faster? Raising your prices. For example, if you plug a 15% price increase across the board into your break-even analysis, will you be able to break even—or ideally, turn a profit—on your forecasted sales?
That said, it’s also important to consider your customers’ price sensitivity. If you raise prices, will customers switch to a competitor instead? Factor in the chance that a price increase may also hurt your sales, and strike the right balance between boosting profits and maintaining customer loyalty.
Conversely, running sales promotions can help you boost your sales volume, though your sales price will be lower. Look at the historical impact of your sales promotions, as well as the associated marketing expenses, to help you determine how frequently to run sales events to make sure your business is staying in the black.
Lower your operational costs
You know that you have a number of fixed expenses that you can’t change—so it’s important to look more carefully at the ones that you can.
For instance, if you’re paying for warehouse storage and staff, could you save costs by outsourcing your inventory management to a 3PL?
Evaluate your suppliers, and look for opportunities to choose lower-cost alternatives without sacrificing product quality. Make sure that you understand the impact to your supply chain in making changes, and have planned your inventory needs accordingly to eliminate the risk of stockouts.
Can you scale your customer support costs more sustainably by utilising chatbot technology and other forms of automation that can help you fulfil more support requests without using more resources?
What about shipping and reverse logistics? By evaluating your carrier options, you might find opportunities to make use of discounted shipping rates, or leverage consolidated shipping for returns from a drop-off center. You might also consider adding a surcharge for customers returning products.
By looking at ways to incrementally lower your operational costs without impacting the customer experience, you may be able to lower your break-even rate.
Identify new revenue opportunities
Finding new ways to add revenue is also a great strategy for getting to your break-even point more quickly—and it doesn’t always mean you need to add new product lines. A good UK returns management strategy can help you to reduce expenses and boost your profit margins.
For instance, by leveraging Loop’s returns management platform, you can improve your return metrics by optimising for exchanges over returns. Loop merchants retain 40% of revenue from their returns, on average, helping them add back dollars to their bottom line that would otherwise be lost to refunds.
Launching a branded resale platform is also a great opportunity to monetise returned and open-box products that your brand would otherwise write off. By partnering with a resale platform, you can capture additional revenue through a branded secondhand marketplace, helping you improve your products’ sustainability and offering more product options at different price points to your customers.
Use your break-even analysis to future-proof your business
While analysing your break-even analysis can help you determine when to raise prices or cut expenses, it can also be used to future-proof your business against various scenarios that could impact your profitability.
For instance, you can evaluate the impact of a potential increase in fuel costs, changes in consumer spending habits, or unexpected market shifts. By regularly revisiting and updating your break-even analysis, you can identify potential risks and adjust your business strategy accordingly.
Additionally, understanding your break-even point can also help you make informed decisions about expanding into new markets or launching new product lines. It allows you to determine the minimum sales volume needed to cover expenses and generate profit in these new ventures.
Overall, incorporating break-even analysis into your business planning can provide valuable insights and aid in making strategic decisions that will drive long-term success for your brand. So take the time to crunch the numbers and use this tool as a guide for maximising your brand’s profitability and sustainability.
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