Break-Even Analysis Methods

There are three break-even analysis methods designed to help measure Cost of Marketing.  Each addresses different but related parts of a company’s needs.

1. Conventional:  determine the number of units to be sold such that gross revenues equal total marketing costs
2. Market Share-related: translate unit break-even into a market-share equivalent
3. Customer-focused: determine break-even for regular customers as against infrequent customers

The Customer Break-Even Analysis Method;

The formula for which is based on several data points:

• Margin on each purchase
• Survival rate
• Cost of each marketing communication
• Expected profit per customer

Inputs to the Formula

The raw data for the inputs necessary to calculate this metric include forecasts for units, revenue and cost (price per unit, for example), all of which can be found in the Accounting and/or Finance departments.  Costs will either come from supplier’s price summaries or from internal production and operations plans.  Unit and revenue forecasts can be derived from each year’s budget and business plans and are typically based on past performance plus an adjustment that accounts for growth in the coming year expected to depart from a projection.

Exceptions to the Rule

While customer break-even analysis is a useful tool in measuring the cost of marketing and is mathematically straightforward, it does carry with it certain exceptions.

There are several less-visible factors that marketers should consider when calculating the break-even point.  Break-even is dependent on list quality, customer retention rates, gross margins, marketing costs, purchase price and purchase frequency but ignores other, sometimes crucial, variables (e.g. when marketing decides to stop all activity focused at inactive customers). Determining when to terminate a customer should be an important part of the planning process, even while acknowledging that there will be exceptions.

In addition, a break-even analysis is less reliable if management is trying to correlate a general-awareness advertising campaign with increases in lead generation and sales.  Unless a marketing campaign has a specific offer to which customers will respond, it would be problematic to use this approach to link a marketing campaign to any specific increase in business.

Break-even analysis is a sales technique used by many organizations to help determine the effectiveness of a marketing program, and ultimately impact client acquisition through strengthened lead generation.