At Alunta we have decided to createa a dictionary for words and important terms related to running a subcription busniess. You are now reading about “Breakeven”.
Breakeven point in a subscription business model is calculated by dividing the fixed costs by the contribution margin ratio. The contribution margin ratio is the difference between the price of the subscription and the variable cost per unit, divided by the price of the subscription. The fixed costs are those costs that do not change with the number of subscriptions sold, such as rent and salaries, while the variable costs are those that do change with the number of subscriptions sold, such as the cost of providing the service or product.
Understanding the breakeven point is crucial for a subscription-based business because it allows the management to know how many subscriptions need to be sold in order to cover all fixed and variable costs. This is the point where the business is not making a profit, but is also not incurring a loss. Knowing this number helps in setting sales targets, pricing strategies, and in making important business decisions related to expansion, investment, and cost control.
A change in subscription price directly impacts the breakeven point. If the subscription price increases, while all other factors remain constant, the breakeven point decreases, meaning fewer subscriptions need to be sold to cover costs. Conversely, if the subscription price decreases, the breakeven point increases, meaning more subscriptions need to be sold to cover costs. Therefore, pricing decisions should be made considering their impact on the breakeven point and ultimately on the profitability of the business.
Check out other topics in our subscription dictionary below. We've gathered the ones we find most relevant in relation to breakeven.
