How Break Even is Calculated

Break-even in direct marketing means that the net profits from sales to a test group exactly equals the cost of promoting that test group. If, for example, we mail 400 people at a cost of $0.50 each, or $200, and the net profit from that group of 400 people (after credits, returns, cost of goods sold, shipping, etc.) is $200, then we have just broken even. Before we begin a promotion, we can calculate the response rate we will need to get from each cell to break-even. There is a neat little formula that tells us this break-even response rate. It is this:

BE = (cost per piece) / (net profit from a single sale) 

If you are selling something for $100 and your profit on a successful sale is $40, then you can calculate the break even rate this way:  If the cost per piece of the mailing is  $0.55. the rate you need for break-even on each mailing cell is:

BE = ($0.55) / $40 = 1.375% 

The break-even index is calculated by another neat little formula. It is:

BEI = ((r – BE) /BE)) x 100 

In this formula, r = the actual response rate of the mailing cell. So if the response rate of one cell is 2.5%, then the break-even index is:

BEI = ((.025 - .01375) / (.01375)) X 100 = 81.82 

A break-even index of 0 means that the cell just broke even. A negative number means that the cell lost money.

Written by Arthur Middleton Hughes, VP, Solutions Architect