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We live in the era when a lot of people want to start their own business and be able to operate them singlehandedly. Although a lot of people work hard and try their best to stay competitive on the market, only some businesses stay on the market for longer than 5 years. According to U.S. Bureau of Labor Statistic: “approximately 20% of new businesses fail during the first two years of being open, 45% during the first five years, and 65% during the first 10 years. Only 25% of new businesses make it to 15 years or more”. Numbers are numbers, but what does this really mean for us as marketers and entrepreneurs and what causes these numbers to stay consistent for years now? 

Well, first of all, the business does not appear overnight. It takes time, hard work, and commitment to start to create. Products or services, build the customer base, and generate a profit in a long run. With that being said the first 6 month to a year we should be closely monitoring how our products are performing, what it is that we can do to make our business better and more appealing to our customers. In other words, we need to be investing both financially and physically into our business to ensure its longevity and success in a long run. It is not until a year after we start the business that we will be able to see some sort of income being generated. That is the time for us to measure our business’s success by monitoring its profits and breakeven. 

What Is a Profit?

First and foremost, the profit is the amount that the owner gets to keep after producing the good or service. It can. Be looked at as a benefit from a certain action. The easiest way to calculate the profit is:

Profit = Price-Cost. 

 For example: if the store sells a shirt for $20, but the cost to make the shirt is $12, then the profit can be calculated by: 

Profit= $20-$12

Profit=$8

What Is a Breakeven?

Breakeven can be described as a point when your expenses equal your revenue, meaning you are just making enough to cover the cost to create a product or perform a service that you offer. It is essentially a point when you have covered all the expenses and are starting to make profit. The units to breakeven can be calculated by: 

Units to breakeven= Fixed costs / $margin

For example, if the company has fixed costs of $1,000 and it $ margin is $20, then the units to breakeven would be:

Units to breakeven= $1,000/$20

Units to breakeven= 50. 

According to the calculations, if a company is selling 51 unit, it is making a profit.

Why is it important to monitor a breakeven point of the business?

First and foremost, we need to know that our investments are paying off. We cannot just be blindly throwing money “out the window” and not be making any profit. I f the company is not able to cross its breakeven point, the management and marketing teams need to take a closer look at the performance of the business in its totality and perhaps to come up with a new marketing strategy (change the materials, lower the price, engage with new clients) depending on who their customers are. 

Secondly, monitoring break even and doing a breakeven analysis will help us as leader to set targets and tailor our strategies in order to reach them. For example:  If we know that our breakeven point is 20 units, we can set the goal to sell 30 units in order to make profit and stay competitive on the marker for a long run. 

Also, knowing what our breakeven point helps us set the prices to be able to make profit based on the amount of units we need to sell in order to be successful and stay in business. 

Let’s take Ralph Lauren as an example 

As we all know, this company has been around for over 50 years, and it continue to be one of the most profitable companies in the world. This company has been through ups and downs. Even over the course of the past 3 years with COVID lockdowns, loss of traffic and price increases the company has struggled, but despite the difficulties, continues to be a strong leader on an international market. So what is its secret? A screenshot of a white and black report
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According to the table above, the breakeven of Ralph Lauren is 6,904 which is extremely low for a multimillion-dollar company. On average Ralph Lauren sells over 10 billion items of different categories worldwide. As we can see, Ralph Lauren’s breakeven point is extremely low compared to its goods sold which is a great indicator of profitability and success of the company. Ralph Lauren continues to keep its breakeven point low and constantly monitors its performance. The company keeps its stores focused on suggestive selling to build UPT and offers coupons and promotions, at least on a factory level to keep the customers engaged. Ralph Lauren’s mission is: “To inspire the dream of a better life through authenticity and timeless style”. And the company has been following that mission statement since day one by offering a longevity and loyalty in both products and services. The company is constantly trying to come up with new ways to make the customers feel special and welcomed (by offering concierge services, private appointments, phone orders) and its strategy is working successfully based of their profits, margins, and breakeven point. 

Conclusion

Overall, breakeven is only one of the metrics essential for the business, although it seems to be the foundation of everything (prices, profit, and even success and longevity of the business in a long run), therefore we as marketers have to pay attention to how we are performing and how much profit we are making in order to stay competitive on the market and not hurt ourselves in a long run. 

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