Why is it Important to Conduct a Marketing Breakeven Analysis?

Conducting a regular marketing breakeven analysis is something that is important for both big businessmen and small entrepreneurs to do. This form of business accounting will show you how much you have to earn to offset all your operating costs; past this point, you will start making a profit. The benefits of conducting a break-even analysis is that it allows you to see the relationship between your production costs and your expenses as well as letting you play around with these figures to determine how changes in costs, prices and revenues will affect break-even points and profit levels. However, the limitation of break-even analysis is that it is best suited to analyzing a single product, as it is easier to determine all the relevant factors required.

The various elements of a marketing breakeven analysis computation are:

•    Fixed costs. Also known as overhead, these are normal expenses that do not change much from month to month. Examples include utilities, rent and insurance premiums.

•    Sales revenues. These represent the amount of income you earn from sales. To ensure the accuracy of your analysis you need realistic sales forecasts based on the actual volume of business you expect rather than estimates of how much you have to sell in order to make a profit.

•    Gross profit per product. This is the amount that remains after you have subtracted the production costs from the sale price. For example, if you have a product that is selling for $500 but it costs you $350 to produce, then your average profit per product is $150.

•    Gross profit percentage. This figure tells you how much of the sale price represents profit. To illustrate, using the above example, the average gross profit percentage of your product is 30 percent.

Using these figures, we can conduct a sample marketing breakeven analysis to determine what your break-even point is. Assuming that your fixed costs are $10,000 a month, divide it by your gross profit percentage or 0.3; this means that you must earn $33,333 a month just to break even. If your expected earnings are less than this, it means that you either have to lower costs or increase sales if you want your business to flourish.

For example, after conducting your marketing breakeven analysis you might decide that you need to find a supplier who will sell to you at cheaper prices, have to increase your prices or find some other way to reduce your costs.

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