Pricing Breakeven analysis

21/03/2020 1 By indiafreenotes

Break even pricing is a strategy focused on penetrating the market by keeping the price of the product in such a manner that the company is neither in profit nor in loss. Break even price has one of the simplest pricing formulas. Fixed cost + Variable cost = Total cost / Break even price. Thus, the key factor to maintain break even price is to determine the exact fixed and variable costs. The application of break even pricing comes when making business and marketing plans as well as when trying to penetrate a new market. Even in the business environment, break even price plays an important role.

Whenever you decide to start your own business, your main goal is going to make it profitable and sustainable. But for every business in the initial stages of the development, it takes time to build profits. In these cases the best option for you is to reach a break even point, where you are neither in profit nor in loss. Profit is the most desirable goal but not losing money and to be on zero loss can also be an alternative solution rather than getting negative results on your investments.

Break even pricing is the practice of setting a price point at which a business will earn zero profits on a sale. The intention is to use low prices as a tool to gain market share and drive competitors from the marketplace. By doing so, a company may be able to increase its production volumes to such an extent that it can reduce costs and then earn a profit at what had previously been the break even price. Alternatively, once it has driven out competitors, the company can raise its prices sufficiently to earn a profit, but not so high that the increased price is tempting for new market entrants. The concept is also useful for establishing the lowest acceptable price, below which the seller will begin to lose money on a sale. This information is useful when responding to a customer that is demanding the lowest possible price.

The break even price can be calculated based on the following formula:

(Total fixed cost / Production unit volume) + Variable cost per unit

This calculation allows you to calculate the price at which the business will earn exactly zero profit, assuming that a certain number of units are sold. In practice, the actual number of units sold will vary from expectations, so the true break even price may prove to be somewhat different.

It is especially common for a new entrant into a market to engage in break even pricing, in order to obtain market share. It is particularly likely when the new entrant has a product that it cannot differentiate from the competition in a meaningful way, and so differentiates on price.

A business intent on following the break even pricing strategy should have substantial financial resources, since it may incur significant losses during the early stages of this strategy.