Knowing your break-even point is critical to any business, but understanding how that translates to market share puts things in perspective. It can help you to set your price points or show you that you need to put more money and effort into marketing and promotions to grab a larger market share or spend more time on cost-saving initiatives. Although you will calculate break-even and market share for one year out, you should monitor this continuously and update it as your prices or the market changes.
1. Determine your annual fixed costs. These are costs that do not change whether you manufacture or sell one unit of product or thousands. Salaries, insurance, rent or property taxes are examples of fixed costs.
2. Figure out what your variable costs are. These are costs that will change based on the number of units of product you produce. If you manufactured widgets, for example, it would cost you a certain amount of money to purchase the raw goods to produce them. Since the cost of goods will increase with each widget you produce, they are considered variable costs. Hourly wages, packaging and transportation are all variable costs as well.
3. Forecast how many units you can reasonably sell each month and how much the market will bear in terms of price. Work closely with your marketing department to ascertain what promotional pushes they have in place for the product and how much those will boost sales.
4. Gain all the knowledge you can about your potential consumers to pin down the market for your product. If your company has a regional and targets a certain demographic, use data sources such as census data to determine how many people who live in that region meet that demographic. Tie that number into your product’s life cycle. If your market contains 10,000 consumers and they only purchase one widget per year, then the total market is 10,000. If they purchase one widget each month, your market number zooms to 120,000.
5. Learn about your competitors. The two things you that are most important for you to understand are how many widgets they sell in that market each year and what their price point is. If 120,000 widgets are sold each year in that market and one of your competitors sells 60,000 widgets in that market, they have a 50 percent market share. Pricing your widget higher or lower than your competitors may impact the amount of sales you can expect to make.
6. Calculate your break-even point. First, determine your profit per unit. If it costs you $2 to manufacture a widget you expect to sell for $20, your profit is $18 per widget. If you believe you can sell 1,000 widgets per month at $18 profit each, that gives you $18,000 per month in sales. At that rate, you would break even and cover the $100,000 fixed costs in roughly 5 1/2 months, or after selling 5,555 widgets.
7. Tie your break-even into market share. If your market sells 120,000 widgets per year and you need to only sell 5,555 to break even, then your break-even market share is 5,555 divided by 120,000, or roughly 5 percent market share.
- If your business is a service-oriented business rather than product-based, such as a law firm or restaurant, use the same technique to determine your market share break-even point, but define what one unit of sales is. In a law firm, one unit might be one billed hour, while a restaurant might calculate it based on the average cost of a meal.
- For market and competitor information, contact industry trade associations or market research companies such as Nielsen or SymphonyIRI.
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