1. “How do I calculate a break-even point?”
You should look at your break even point as a line you need to cross before you can hope to grow your e-commerce project. This means that before you embark on your online sales adventure, you need to have a clear picture of this threshold. To put it simply, remember that this so-called break-even point depends on the following 3 factors:
- The expected turnover of your online store – How many orders do you receive each month? How much is your average shopping cart? How much room for improvement do you have
- Your fixed and variable monthly expenses (electricity bill, rent, accounting fees, delivery and housing costs…)
- And finally, your variable cost margins, which is just your turnover minus your variable expenses.
- For e-commerce, the average shopping cart, or average amount an Internet users spends on an online order varies from €30.67 (for a site that offers cultural and entertainment experiences) to € 76.03 (for a site that focuses on food products), all the way up to €237.58 (for a travel and/or leisure site).
- The average cart is around €30 (compared to €91 in 2011). Source: FEVAD).
2. “But in practical terms, what does it look like?”
To calculate your break-even point, use the following formula: break-even point = fixed costs/variable cost margin. An example will work better than a long explanation, so picture this:
- Your preliminary sales turnover is € 40 000 (the equivalent of 500 items sold per year)
- Your fixed costs add up to € 500 per month (or € 6000 per year)
- Your variable expenses rise to € 8 per item sold (so 500 x 8 = € 4 000).
In this specific case,
- Your variable cost margin will be € 36 000 (40 000 – 4 000)
- Your variable cost margin rate will be 9% (36 000 / 40 000)
- Therefore, your breaking point threshhold will be € 6 666
Verdict: Your online store will not be profitable until you reach € 6 666 in sales turnover.
Be forewarned. Just because you’ve created an e-Commerce site, doesn’t mean you’ll have more time for yourself. This is quite far from the truth! In fact, managing a virtual store can be just as time-consuming as a brick and mortar shop. You have to constantly attract clients and offer products that meet their expectations. You must also be sure to stay up-to-date and make your site evolve with the times.
Key Points to Remember
- The break-even point or threshold is the total you must reach if you want to cover all expenses.
- To neglect to calculate your break-even point is the equivalent of running your business with a blindfold on.
- Once you reach this threshold, and not a moment before, your e-commerce site will begin to be profitable.
- Managing an e-commerce site is a very time-consuming endeavour that requires at least as much personal investment as a physical store.