Profit margin is the share of each sale you keep as profit: gross margin = (price minus cost of the product) divided by price, and net margin = net profit divided by revenue. Your break-even point is the number of sales needed to cover all fixed costs: break-even units = fixed costs divided by (price minus variable cost per unit). Knowing these three numbers tells you whether a business can work, how many sales you need each month, and how much you can afford to spend on marketing to win a customer.
- Gross margin shows if a product is worth selling. Net margin shows if the business is worth running.
- Contribution per unit (price minus variable cost) is the money each sale adds towards fixed costs.
- Break-even units = fixed costs divided by contribution per unit.
- Small price increases often move break-even much more than extra sales effort.
- Check your numbers with the free AI Business Growth Consultant.
“We sold 300 orders and still lost money”
Picture a small online shop selling phone covers. Last month was its best ever: 300 orders. The owner is proud, until the bank balance says otherwise. After the covers themselves, courier charges, packaging, cash-on-delivery fees, returns, Facebook ads, a part-time helper and the internet bill, there is almost nothing left.
Sales feel like success. But revenue is not profit. Without knowing your margins and break-even point, you can grow a business straight into a loss. The good news: the maths is simple, and you can do it on one page.
The key terms in plain words
| Term | What it means | Formula |
|---|---|---|
| Revenue | Money from sales | Price x units sold |
| Variable costs | Costs that rise with each sale | Product, packaging, delivery, payment fees |
| Fixed costs | Costs you pay every month regardless of sales | Rent, salaries, software, internet |
| Contribution per unit | What each sale adds to cover fixed costs | Price minus variable cost per unit |
| Gross margin | Profit on the product itself | (Price minus product cost) divided by price |
| Net margin | Profit after all costs | Net profit divided by revenue |
| Break-even point | Sales needed to make zero profit, zero loss | Fixed costs divided by contribution per unit |
A worked example
Variable cost per cover: product 150 + packaging 20 + delivery subsidy 60 + COD and payment fees 15 + returns allowance 25 = 270 taka.
Contribution per cover: 450 minus 270 = 180 taka.
Break-even: 36,000 divided by 180 = 200 covers a month. Every cover after the 200th adds 180 taka of profit. At 300 covers, profit is 100 x 180 = 18,000 taka, before any advertising not already in fixed costs.
Gross margin on the product: (450 minus 150) divided by 450 = 66.7%. That looks great, but contribution margin after all variable costs is 180 divided by 450 = 40%. This gap is where many small businesses fool themselves.
How to calculate your break-even point, step by step
- List fixed monthly costsRent, salaries (including yours, if you need to pay yourself), software, internet, phone, loan payments.
- Find the variable cost per unitProduct cost plus every cost that comes with one sale: packaging, delivery, fees, average returns.
- Subtract from pricePrice minus variable cost gives contribution per unit.
- DivideFixed costs divided by contribution per unit gives break-even units.
- Convert to revenue if usefulBreak-even units x price gives the break-even sales amount.
- Compare with realityIs the break-even number realistic for your market and capacity? If not, change price, costs or the model.
Three levers to improve your margin
How much can you spend to get a customer?
If each sale contributes 180 taka and a typical customer buys twice in a year, that customer brings 360 taka of contribution. Spending more than that to acquire them means losing money, even if sales look good. This is why retention matters: every repeat order raises what you can afford to spend on ads.
To see how margin connects to marketing spend, read customer acquisition cost and lifetime value.
Common mistakes
- Forgetting delivery subsidies, COD fees and returns.
- Not paying yourself, so the business only “profits” because your time is free.
- Confusing markup with margin.
- Calculating once and never updating when supplier prices change.
Put your numbers to work
Once you know your break-even point, add it to your one-page business plan and set monthly targets. For a quick review of your pricing and cost structure, describe your business to the free AI Business Growth Consultant.
Sources
Frequently asked questions
How do I calculate profit margin?
Gross margin is (price minus product cost) divided by price. Net margin is net profit divided by total revenue. Multiply by 100 to get a percentage.
What is the break-even point formula?
Break-even units equal fixed costs divided by contribution per unit, where contribution per unit is price minus variable cost per unit.
What is the difference between gross margin and contribution margin?
Gross margin usually looks only at the product cost. Contribution margin subtracts all variable costs of a sale, such as delivery, packaging and payment fees, so it shows what each sale really adds.
What is a good profit margin for a small business?
It varies by industry. Service businesses often have higher margins than retail. Compare yourself with your own past results and similar businesses, and make sure margins cover a fair salary for you.
How can I lower my break-even point?
Raise your price, cut variable costs, increase average order value or reduce fixed costs.
Answer a few questions about your business and get a practical growth plan you can start this week.
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