Calculating the break-even point for online campaigns

How do you know the point in a campaign where fixed and variable costs are left behind and profitability starts?

You can calculate the break-even point to know the answer to this very important question. Often-times we have to look at a past campaign’s response performance to reasonably predict the future.

According to Wikipedia break-even is defined as the point at which cost or expenses and revenue are equal: there is no net loss or gain, and one has “broken even.”

Important variables:

1. The cost of a campaign – Example: $400.
2. Net profit – Revenue that exceeds costs for each product sold. Example: After costs the net profit on each product sold is $40.

Calculating break-even:

Campaign cost of $400 divided by net profit of each product, or $40, expressed as $400/$40.

You must sell 10 products to break-even and on the 11th product sold you begin to see a profit in the marketing campaign. Basically, the marketing campaign is adding an additional cost to each product sold up to the break-even threshold.

The relationship of  campaign profit and the break-even point are inversely proportional. If you increase your net profit by increasing the sales price without increasing your manufacturing costs, or lower the manufacturing costs without changing your sales price, the break-even point will go down. If you decrease the selling price without lowering your costs, your break-even point will go up but you might have a higher conversion rate so your overall profit margin in the campaign could increase.

You must experiment to find the sweet spot that works best for your organization. The important take-away here is that it’s important to understand your costs and how they control your profit margin and marketing expenditure.

Ron Scott
Manager of eBusiness Strategy
ronscottjr@gmail.com

Tags: break-even, conversion rate, marketing, profitability, web analytics