What is Break-Even-Point? How to Calculate the Break-Even Point in Businesses

The break-even point is the level of business activity at which a firm's total revenue equals its total costs, so there is no profit or loss. At this point, the cost of production and the price match each other. From this point, you can move toward profit by improving your operations efficiently, or, on the other hand, you may incur losses due to mismanagement and defective planning.

Break-Even Point Definition

Break-Even Point can be defined as a point in business scale at which the value of total costs equals total sales or revenue at any point in time. 

It is a point where expenses equal income, and there is neither profit nor loss in the operations of the business. The values of sales and production of the business break even at this point on a curve or line joining the costs and revenues.

Importance of Break-Even Point

• Break-even points help calculate the minimum level of output that must be exceeded to make a profit in business. In other words, you can determine the minimum quantity of sales required to cover all expenses and generate an additional unit of profit.
• The business owner can determine the minimum number of units that must be produced and sold to cover both fixed and variable costs, so that profits can begin with an extra unit sold.
• Break-even point calculations are used by management to decide a product price and the minimum sales target to be achieved.
• Further, it is very useful in controlling fixed costs, as able to understand the impact of fixed costs on your performance level.

How to Calculate Break-even Point

The break-even point formula assumes that Total Cost is equal to Total Revenue or income.
Now, total cost includes both Fixed Cost and Variable Cost.

Total Fixed Cost is your fixed expenses, which more or less remain the same. 

But Variable Cost is related to the number of units produced. So Total Variable Cost depends on your production and sales quantity. 

Let us assume that Variable Cost multiplied by the number of units gives you the Total Variable Cost. 

If Variable Cost is V and the number of units is X, then Total Variable Cost = V*X (Variable cost multiplied by X units).

Now, Let Total Fixed Cost be TFC, and Total Revenue be TR. 

But Total Revenue is the Price of one unit multiplied by the number of units produced or sold. So, let TR be equal to P*X (Price multiplied by X units)

Now, the break-even point, or BEP, will be equal to TFC + VX = PX 

Let us find the value of TFC (by subtracting VX from PX):
TFC= PX- VX  = X (P-V)

Now, to find the number of units required to be produced or sold, the equation will be
X = TFC divided by P-V

If we give values to the above concepts:- 

Suppose TFC = 10,00,000

P is 100 and V is 60.

Substituting the values from the above formula,

X is equal to TFC/ (P-V), so 

ie., 10,00,000 divided by (100- 60) 

ie. 1000000 divided by 40.

= 25,000 units

The number of units required to produce and sell is 25,000 units. This is the break-even production or break-even sales to be achieved in order to cover the full expenses incurred by the business.

Benefits of using Break-Even-Point concept

• By using this method, you can determine the production and sales targets your business should achieve during any period.
• You can control costs by determining the production levels based on your available options to maximize benefits and manage profits.
• In the example above, if you find it difficult to produce 25,000 units, you may consider other options, such as reducing your Total Fixed Cost, reducing the Variable Cost, or even increasing the selling price of your product to meet your production expenses.
• You can plan your future and build budgets and projects with the help of this break-even concept.

Limitations to Break-Even-Point applications

There are some limitations in applying this method as it is based on assumptions.

• Break-even concept assumes that Fixed Costs are constant. But in real practice, fixed costs can also change when there is a large-scale increase in production or sales, as you need to employ more staff and hire more space for increased activities, and many other related expenses also increase.
• This concept again assumes that variable cost is constant during the entire period of application of this concept. If there is any slight variation in the variable cost during the period of application, then also, the entire calculation will become useless, and all predictions will go wrong.
• This method does not take into account the stock of inventory as it assumes that production quantity is equal to sales quantity.
• It further assumes that in multiple product companies, the mix ratios of produced goods are equal to the ratios of sold items. It considers that the relative ratios between different products are maintained the same as those of sales. But in actual practice, you may not be able to sell all of your produced goods. If there is a stock of varying products, their stock ratio can differ from the production ratio of goods.

Marketing Strategy & Techniques :Three Stages in Business for Applying Marketing Strategy

Need for implementing Marketing Strategies:
As I discussed earlier in another chapter, marketing managers apply both scientific and artistic approaches to create a solid customer base, devising strategic techniques and employing a 4P plan. So, I will discuss other important points that need attention.

Selling your product requires a great deal of wooing your customers. 

Gone are the days when businessmen used to simply open their shops and wait for customers to come and buy goods with their money. There is much competition now, and nobody will approach you on his own to buy your product unless you attract him with your Marketing Strategy.

Selling your product requires compelling appeals and effective strategies to attract buyers and establish your market. Marketing strategies are aimed at expanding sales and promoting the business. It is a package of plans and techniques employed to establish and promote your business. It involves the use of many different techniques at different levels of business. 

Before starting a business, you need to understand buyers' tastes, identify your prospective buyers, and determine the areas for your market. Then, you need to advertise your products and services, offer discounts and incentives to create a market for your goods, and establish a strong hold in your area.

Apply Strategies According to Nature of Business:

Different types of products or areas of market require strategies typical of their business types. 

So strategies can differ from product to product or from area to area. 

An agricultural product requires its own typical strategy, and an electronic product requires its own strategy for marketing. 

Similarly, more advanced cultures need their own typical strategies, whereas rural culture has its own strategy for marketing. 

But overall, the principles are the same. We need to find out our market and prospective buyers. Then we establish our business by choosing the products and areas of operation according to the requirements. Then it involves retaining the customers with incentives so that they may not shift to other products and sellers.

Three Stages of Businesses in Applying Marketing Techniques

 
Any type of business goes through three stages while setting up their business and its market. These stages are as follows:

• Locating business opportunities and areas before starting a business through study and research.
• Promotion of the business after setting up your product and market.
• Retaining the market base and customer confidence through good quality, after-sales service and support.

All three stages of business require employment of appropriate and efficient marketing techniques. Let us study the techniques employed at each of these stages of business.

Marketing Techniques Before Establishing a Business

1. Conduct research to study the culture and tastes of the area where you want to establish your business. This will let you know what options are available for you to trade in, and you can choose one that is most suitable to you. For example, if the people are more cultured and like fashionable dresses, advanced electronic items, or continental foods, you can choose one of these items as your business.
2. Know about the resources available for procuring or producing your goods and about available transportation facilities for conducting your business.
3. Keep knowledge of the local laws and restrictions that are in effect in your business area to protect yourself from any later complications. 

Marketing Techniques Upon Starting the Business

1. Ensure good quality of your products. Your product should be preferred by customers in comparison with other sellers. Only then will they come to you.
2. Pricing should be reasonable. Fix your product price at a reasonable level, a bit lower than other traders, so that customers are attracted by the low price. The difference need not be much. Even a fraction of 1% can attract more customers to your product.  
3. Ensure continuous availability of your products. If customers do not get what they want readily from your store, they will go to other shops, and you can lose your customer base.
4. Promote your business through activities like distributing pamphlets, erecting posters and banners at different places in your area so that people come to know of your business. You can advertise through TV channels and by placing advertisements in newspapers also. Showing a celebrity using your product can be a more effective tool of publicity for your product. These are all publicity stunts for growing your business.
5. Make your online presence felt by maintaining a website and posting the salient features of your business and all your products there. This will help prospective buyers find sellers of their products more easily.

Marketing Techniques for Retaining Customers

1. Offer some value-added services and discounts to regular customers. Offer a discount, a coupon, or a points card to attract new customers and satisfy regular customers. They are pleased to know that they receive points or discount coupons every time they shop with you, and they return more frequently to enjoy this satisfaction.
2. Offer free Appraisals and usage/maintenance tips on your products. Let the customers know some important features and facts of your product that they do not know. Also instruct them how to use and maintain the product for longer-lasting benefits. This will make them more confident about your products.
3. Another important technique to be employed in business is the packaging and brand image of your product. A nice package with good design and appealing colours will enhance your product. They get associated with your brand image as an identity for good quality. 
4. Ask for feedback from customers to know their opinions about your products and services. Thereby, you can know about the likes and dislikes of customers, why they are choosing your product instead of others, and how you can improve your quality to satisfy them. This will always help you improve your business and grow your customer base.
5. One more technique is Goodwill to interact with customers in a cool manner when they come to you or are online. Applying gentle manners and a sweet voice enhances your image in their minds and creates a great image of your business and goodwill among customers.
6. Adding new items to your business can keep the customer base intact and also create new customers.
7. Finally, be prepared to adapt to the changes in tastes, culture, and technology.

What is Marketing? Differences between Selling and Marketing

Marketing is the process of creating a market for your products through selling and business promotional activities. It is a kind of communication that instills trust between prospective buyers and sellers/producers of goods and services.

But selling is very limited in scope. It aims simply to sell the product without caring for quality assessment and customer care.

Definition of Marketing

Marketing is the process of communicating the significance and value of a product or service through promotional activities and brand building, thereby creating a customer base for the business.

It is a set of activities employed by a company engaged in the buying and selling of goods and services, including consumer research, advertising, and selling up to the point of delivery of goods to the ultimate consumers.

Marketing Techniques

• The marketing process employs both scientific and artistic approaches while selling their products. 
• Scientific approach because it involves a systematic search of market conditions and research of customer tastes and product quality. 
• Artistic because it needs to appeal to the customers' feelings and emotions.
• It employs the 4 P's of marketing - Product, Price, Place and Promotion. 
• These 4 P's determine their marketing activities. They showcase the products in an appealing style, tag prices with lucrative offers, locate demanding markets, and indulge in promotional activities like spreading awareness through brochures/pamphlets, erecting banners at locations, or publishing appealing advertisements and TV promotionals. 
• The ultimate goal of marketing is to reach customers with the aim of satisfying their needs and maintaining a long-term relationship with them.

Differences Between Selling and Marketing

Now, coming to the discussion of differences between selling and marketing concepts, let us look at the salient features of selling and marketing activities:

Differences between Selling and Marketing

SELLING	MARKETING
Narrow minded	Broad-minded
Limited in scope	Unlimited scope
Engaged in simple selling activities	Involves customer creation, selling, and business promotional activities also
Sole purpose is profit making	Thinks about customer care, social cause, and product quality also
Operates in a limited area	Engages in widespread areas
Limited staff engagement with a sole proprietor as owner	Employs a huge staff of marketing and sales managers, selling agents, and sales staff
The proprietor himself oversees sales	Marketing manager is head for marketing activities
Selling is done simply by sitting in the shop	Marketing involves field study and fieldwork
Customers come on their own needs	Customer base is created by wooing them

The above are some of the major differences between sales and Marketing activities.