Calculating the Break-even Point in a dropshipping

The break-even point is the amount a business needs to earn to cover all overheads, both fixed and variable. This is when expenses are equal to revenue and the business is operating without a loss, but not yet making a profit.

When calculating the break-even point, it is important to consider:

• Fixed costs

These costs are independent of sales volume: warehouse or office rent, service fees (hosting, CRM, accounting), employee salaries, and marketing basic expenses.

• Variable costs

Costs that are incurred with each sale: cost of goods (purchase price from the supplier), commission of payment systems or trading platforms, logistics costs (delivery, packaging) and other costs directly related to each unit of goods.

• Commissions

Fees for services: platforms (Shopify, WooCommerce, often 2-3%), payment systems (PayPal, Stripe, usually 2% to 5% for each payment), marketplaces (Amazon, eBay, percentage of sale 10-15%), banks and acquiring (usually 1-3%), advertising (Facebook, Google Ads).

• Returns

Costs associated with processing returns, repairing or re-selling returned items.

• Illiquid stock

Items that are difficult to sell (not current, out of fashion).

• Discounts and promotions

Price reductions affect margins.

The first and simplest method of calculation uses averages based on each product's share of total sales: how many units of a product must be sold to cover all costs. +

Breakeven Point = Fixed Costs / (Average Price - Average Variable Costs)
This formula calculates the average marginal profit for all products based on their prices and costs.

Example calculation:

• Product A: price = $60, cost price = $20, commission = $1.8, logistics = $5, advertising = $15, product A margin: $60 - $20 - $1.8 - $5 - $15 = $18.2.
• Commodity B: price = $40, cost = $15, commission = $1.2, logistics = $5, advertising = $15, margin of commodity B: $40 - $15 - $1.2 - $5 - $15 = $3.8.
• Product C: price = $80, cost price = $30, commission = $2.4, logistics = $5, advertising = $15, product C margin: $80 - $30 - $2.4 - $5 - $15 = $27.6
• Average profit margin: (18.2+3.8+27.6)/3=16.53
• Fixed costs (rent, website, services, advertising): $3000 per month
• Breakeven point: 3000/16.53=181 units

The online shop needs to sell 181 units of goods each month to cover all costs. The calculation can be detailed and the strategy for each product category can be adjusted to the total sales volume, optimising the assortment and advertising budgets, said the managers of TON OP company.

This formula shows how many units of a particular product (or group of similar products) you need to sell to cover all fixed and variable costs for that product. This makes sense if your business sells only one product or if all products have the same price.

Break-even point (units) = Fixed costs / (Price - Variable costs per unit)

Calculation example:

• Let's say an online shop sells only one product for $50, and its variable costs per unit are $20 (cost + commission + shipping).
• Fixed costs (rent, website, services, advertising): $2000 per month
• Breakeven point (in units): 2000/(50 - 20) = 67 units

So, it is necessary to sell 67 units of goods every month, so that the business does not work in the minus.

Instead of calculating the number of products, you can determine how much revenue you need to break-even. This method allows you to see the overall picture of the financial needs of the business.

Break-even Point (revenue) = Total Fixed Costs / Marginal Profit.
(where Marginal Profit = (Revenue - Variable Costs) / Revenue)

Calculation Example:

• Let's say a business has fixed costs of $5,000, an average product price of $60, and an average marginal profit (difference between price and variable costs) of $25.
• Margin share: 25/60 = 0.4167 (41.67%)
• Minimum revenue required: $5,000/0.4167 ≈ $12,000.

This means that the online shop needs to receive at least $12000 per month in revenue to cover all costs.

According to TONOP managers, the easiest way to lower the breakeven point in an e-commerce business is to raise prices. More often than not, this is not possible. Therefore, it is important to:

• Monitor sales volume. If actual sales are below the breakeven point, you need to rethink your product range or marketing strategy.
• Optimise variable costs. For example, look for more favourable suppliers, reduce logistics costs or payment system fees.
• Evaluate prices. Perhaps a small price increase can help you achieve profitability faster.
• Reduce fixed costs. For example, you could eliminate unnecessary services, rent a smaller warehouse or optimise advertising costs.

Calculating the breakeven point manually is inconvenient, especially if you use several advertising channels. You can mix up the data, forget to save the results of the calculations, or incorrectly specify expenses. It is better to automate the calculations.

TONOP's BI tools offer custom solutions for automating breakeven point calculations. Synchronisation of data on advertising costs (Facebook, Google Ads via API), prices and production costs (CRM or databases) allows you to:

• quickly analyse the profitability of each campaign
• automate the calculation of the break-even point
• Monitor the effectiveness of advertising campaigns in real time.