How to Calculate Your Breakeven Point and Price Your Products

A product that costs R70 to make and sells for R140 leaves you with R70. Sounds like a decent return, until you remember there's still rent, electricity, staff and other business expenses to pay.

It's easy to focus on how much you're selling without knowing how much you're actually making. And when prices are based on what competitors charge or what customers seem willing to pay, some of those costs can get overlooked.

Getting your pricing right starts with understanding your costs. Once you know what you're spending, you can work out your profit margins and calculate your breakeven point – how much you need to sell to cover your business expenses.

We'll use a small candle business as an example, with straightforward calculations you can apply to your own products.

Start with your costs

Before deciding what to charge, you need a clear picture of what it costs to run your business. That includes more than the price of buying or making your products. Rent, electricity, packaging, transport, data and staff costs all affect how much money you eventually take home.

The easiest place to start is by separating your expenses into fixed and variable costs.

Fixed costs vs variable costs

Fixed costs are expenses that stay relatively consistent each month, regardless of how much you sell. Variable costs change depending on how many products you make or sell.

Here's how the two compare:

Imagine you make and sell scented candles. Every candle needs wax, fragrance, a wick, a jar and packaging. The more candles you make, the more you'll spend on those materials. Your monthly workspace rental, on the other hand, stays the same whether you sell 20 candles or 200.

Understanding this difference helps you work out what each product costs and how much you need to sell to cover your monthly expenses.

It's also worth understanding your cost of sales, which is what you spend directly on the products you sell. This helps you see how much of your sales income goes towards buying or producing stock.

And if stock takes up a big part of your budget, knowing what to order matters just as much as knowing what to charge. Avoiding common stock management mistakes can help you prevent money from being tied up in products that aren't selling.

Choosing a pricing approach

Once you understand your costs, you can start working out what to charge. There isn't one pricing strategy for small businesses that suits every product or industry, but there are a few common approaches worth knowing.

1. Cost-plus pricing

This involves adding a percentage, known as your markup, to the cost of a product.

If making a candle costs R70 and you add a 100% markup, your selling price would be R140.

It's a straightforward way to calculate a price, but remember that the additional R70 isn't all profit. You still need to cover your fixed business expenses.

2. Competitor-aware pricing

Looking at what other businesses charge can help you understand the market and what customers are used to paying.

But matching the cheapest competitor isn't always practical. Their suppliers, expenses and sales volumes may be very different from yours. Use competitor prices as a reference rather than the only factor in your decision.

3. Value-based pricing

This approach considers what customers are willing to pay for the value your product offers.

For example, a handmade candle with a unique fragrance, attractive packaging and locally sourced ingredients might sell for more than a basic supermarket candle. The price reflects more than the materials used to make it.

Many businesses use a combination of these approaches. Your costs give you a starting point, while your customers and competitors help you understand whether the price makes sense in the market.

Working out your profit margin

Your profit margin shows how much of your selling price is left after costs, expressed as a percentage.

Let's use our candle business again. If you sell a candle for R140 and it costs R70 to make and sell, you have R70 left before your fixed business expenses.

To work out the margin:

Margin (%) = (Selling price − Cost) ÷ Selling price × 100

Using our example:

(R140 − R70) ÷ R140 × 100 = 50%

This means 50% of your selling price is left after the direct costs we've included. It's your margin on the sale, not your final business profit. Rent, salaries and other overheads still need to be covered.

It's also important not to confuse markup with margin. A 100% markup on a product costing R70 gives you a selling price of R140, but the margin at that price is only 50%.

That difference matters when you're setting prices and trying to work out how much your business is earning.

How to calculate your breakeven point

Your breakeven point is where your sales income covers your total costs. At this point, you're not making a profit, but you're not making a loss either.

Calculating it helps you understand how many products you need to sell before you start making money.

Here's the breakeven point formula:

Breakeven point (units) = Fixed costs ÷ (Selling price per unit − Variable cost per unit)

The calculation works in three steps:

1. Add up your monthly fixed costs.

2. Subtract the variable cost of one product from its selling price.

3. Divide your fixed costs by the amount left over.

The amount left from each sale is called your contribution margin. It's the money available to cover your fixed costs and, once those are paid, contribute towards profit.

A worked breakeven example

Let's say you run a small candle business, selling your products at local markets and through social media.

Your monthly fixed costs come to R7,000, including your workspace, utilities and other regular expenses. You sell each candle for R140, and it costs R70 to make and sell.

Here's how the numbers work:

You need to sell 100 candles per month to break even.

At 100 candles, your sales income would be R14,000. Your variable costs would come to R7,000, and your fixed costs would be another R7,000. That leaves you with R0.

You've covered the expenses included in the calculation, but you haven't made a profit yet.

For this example, we're assuming the R70 variable cost includes all expenses that change with each candle sold, including materials, packaging and applicable transaction fees. Your own figures will depend on how your business operates.

Using your breakeven number to make decisions

Knowing your breakeven point gives you a useful starting point for setting prices, planning sales and managing expenses.

Let's look at what happens to our candle business when sales increase or decrease.

These are simplified monthly operating figures, before tax and any costs not included in the example.

At 70 candles, the business makes a loss of R2,100. At 100 candles, it covers its costs. And at 120 candles, it earns R1,400 after the expenses we've accounted for.

This gives you a clearer picture of the sales volume your business needs and what changes could make a difference.

Review your prices

If your costs increase but your selling price stays the same, you'll need to sell more products to cover your expenses.

Discounts have a similar effect. If you reduce your candle price from R140 to R130, while your variable costs remain at R70, each candle now contributes R60 instead of R70.

Your breakeven point increases from 100 candles to 117 candles per month.

That doesn't mean discounts are always a bad idea. They might help you sell more products or clear older stock. But you'll need to consider whether the extra sales make up for the smaller amount earned on each item.

Look for unnecessary expenses

You might find that your packaging costs more than it needs to, you're paying for subscriptions you rarely use, or you're ordering more stock than your business can sell.

Reducing these costs can improve your margins without changing your selling price. Just be careful not to cut expenses that affect your product quality or customer experience.

Set sales targets based on your numbers

If you know you need to sell 100 candles to break even, you have a starting point for your monthly target.

You can then work out how many additional sales you'd need to reach a particular profit goal.

For businesses that experience seasonal demand, it also helps to plan around busier and quieter periods. Finding ways to increase retail sales during busy trading seasons can help you make better use of those opportunities without relying entirely on discounts.

Know what's actually selling

When you sell several different products, your overall sales total only tells part of the story.

Some products sell quickly but have smaller margins. Others might sell less frequently but leave you with more money after their direct costs.

Knowing which products are selling, how often they're purchased and what they cost can help you make better pricing decisions.

A point of sale system that tracks product sales and stock, like iK POS, can make it easier to monitor what's moving through your business. You can use that information alongside your cost records to review prices and identify products that may need attention.

Keep in mind that our breakeven example focuses on one product. If you're selling several products with different prices and costs, you'll need to consider how much each contributes towards your overall expenses.

Pricing with confidence going forward

Pricing is something you'll need to revisit as your business changes. Supplier costs go up, electricity prices change and the amount customers are willing to spend can shift over time.

Rather than guessing what to charge, start with your costs, understand your margins and work out your breakeven point. These numbers give you a clearer picture of what your business needs to earn.

It's also worth remembering that profit and cash flow aren't the same thing. Your business might be profitable on paper but still struggle to pay suppliers if too much money is tied up in stock or customers haven't paid yet. Understanding how cash flow works helps you see how money moves through the business alongside what you're earning.

As your business grows, revisit your prices whenever costs change or you introduce new products. Keep your calculations up to date, track what sells and use those numbers to decide where adjustments are needed.

You won't always get your pricing exactly right the first time. What matters is having a way to check the numbers and make changes before small pricing mistakes become bigger financial problems.