One of the most important tools in business is to calculate how fast you can break even [every year]. Basically, it means that you have to sell X-number of items before you can start turning a profit. This is different than ROI or ROIC.
This helps you:
- identify realistic goals
- clarify target audience
- set reasonable prices
- target cost reductions
In a nutshell, the formula is as follows:
Below, I’ll list examples of fixed costs and variable costs.
Break-Even Example
Let’s imagine that you sell coffee. Your company’s fixed costs (per year), including salaries, is $100,000. The price you sell each coffee is $2.20. The variable costs (i.e., coffee beans, soy milk, paper cups) come out to $0.30 per serving.
Formula:
Fixed Costs / (Price – Variable Costs) = Number of Units to Break Even
$100,000 / ($2.20 – $0.30) = 52,632 cups
Therefore, you need to sell 52,632 cups per year (roughly 144 cups per day) before you break even. Only after that point is marginal profit. To reduce your break-even point, you can do either or a combination of the following:
Ideally, you combine the aforementioned coupled with increased sales.
For Photographers
One of the attractive traits of being a photographer is low PPE investments — plant (non-existent), property (non-existent), equipment (cameras) — and the margins for service is substantial (for now), unless you earn based on prints.
However, keep in mind that salary is a part of fixed expenses, so your fixed expenses can be as high as your ambition. Don’t forget to add on FUTA / SUTA taxes (for those who operate in the US). If it’s $200,000 per year, then you better start shooting a lot.
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Examples of Fixed Costs
- Amortization
- Depreciation
- Property Tax
- Lease
- Salaries
- Utilities
- Insurance
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Examples of Variable Costs
- Raw Material Costs
- Production Supplies
- Commissions
- Credit Card Fees
- Transportation Costs
- Billable Staff Hours
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Due to the low cost of equipment (cameras, lenses, etc.), you can quickly and easily amortize your expenses. The more you shoot, compensating for depreciation, the quicker it starts making money!
After that, it’s all about increasing customers’ willingness to pay (aka, your prices)!
Your coffee-loving photographer,
Lawrence Chan
P.S. How do you like your coffee? And how often do you have it? Comment below!
TOFURIOUS 
While I love soy lattes, my go-to drink is a cold-brew, which I make every night to enjoy the next morning. I wish that I had my espresso machine, but my New York apartment is too small to have such a luxury.
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I like my coffee strong with a lot of cream…heavy whipping cream…very creamy! Maybe you could equip your NewYork apartment with a Nespresso Pixie (or other tiny espresso maker). Ours is so small that we always take it when traveling.
Also, I love your blog because it’s short, to the point, and informative with the bonus of beautiful images of food.
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I’ll look into that Lynn. Thanks for the kind words and suggestion!
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too small for a nespresso machine? My french apt is tiny and there is room 😉
I love my lattes as well but not too hot.
Good post though which is thought provoking, great job as always!
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Hello Tofurious! Thanks for this article. It came at the right time for me. Pricing and the true numbers are something more creative professionals need to take seriously.
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