How to Calculate Breakeven for a CPG Company

Running a successful consumer packaged goods business requires mastery of your company's finances. One key metric for profitability — the breakeven point — shows when your revenue covers your costs. At this point, your business starts generating profit.

Understanding the breakeven calculation for CPG companies enables better cost management and price setting and lays out a clear path to profitability. In this post, I use my 9 years specializing in financial planning and analysis to help you discover what makes your company the most money, whether you're launching a product or scaling operations.

What Is Breakeven and Why Is It Important for CPG Brands?

The breakeven point financial metric refers to the moment your business' total revenue equals its total costs. Determining this threshold clarifies when your business stops bleeding cash and begins improving its financial health.

Breakeven analysis for CPG brands gives founders actionable insights that help them set realistic financial goals. For instance, this metric helps determine how many units you need to sell to cover fixed and variable expenses. This information assists you when adjusting pricing strategies, streamlining production processes and setting sales targets that align with your long-term goals.

In CPG financial analysis, the breakeven point also empowers founders to make informed decisions about the profitability of various products. 

Industry-Specific Breakeven Issues With CPG Brands

Breakeven dynamics vary wildly based on production models. Brands relying on outsourced manufacturing may face higher variable costs due to labor and material charges, while those with in-house production might have higher fixed costs due to rent, utilities, and equipment maintenance. Understanding these nuances can help you fine-tune your breakeven analysis for CPG brands and make strategic decisions that align with your business model.

The Breakeven Formula for CPG

Calculating your breakeven point requires some figures from your company's accounting department, including:

• Fixed costs: These expenses don't fluctuate based on production or sales volume, and they include rent, insurance, and employee salaries.

• Variable costs: These expenses change depending on your production levels. For CPG companies, they might include raw materials, packaging, and shipping.

• Price per unit. This figure represents the selling price of each product.

Now that you know what to include, insert the figures into this breakeven point formula to determine where your business stands:

Breakeven Point (Units) = Fixed Costs / Price per Unit - Variable Cost per Unit

You can crunch the numbers yourself or use a breakeven calculator to do the heavy lifting.

Applying the Breakeven Point Formula to Your Business

Apply the breakeven point formula to understand how much product you need to sell monthly to cover your costs. For instance, when working with wineries as the FP&A Team Lead at BBG, I calculate the exact number of bottles they need to sell to avoid financial loss. This knowledge provides clarity and direction so my clients can set sales targets and create a marketing strategy with confidence.

Understanding Fixed and Variable Costs

Conducting a breakeven calculation for CPG companies requires clearly distinguishing between fixed and variable costs to keep your company finances in order. Both expenses play pivotal roles in determining when your company hits its breakeven point.

Fixed Costs

Fixed costs remain consistent regardless of the number of units you sell. Some founders assume some costs fluctuate, but we suggest categorizing anything you can't negotiate as a fixed cost. For instance, I advise companies that even though contractor costs may vary, they should be categorized as fixed expenses if they use those services regularly.

Common fixed costs for CPG businesses include:

• Office or warehouse rent

• Salaries for full-time workers

• Insurance premiums

• Utility bills for water, electricity, and internet

Variable Costs

Variable costs rise and fall with your production volume. Often overlooked by new founders, these costs include things like freight and trade spend — two substantial costs for CPG brands. Underestimating variable costs can throw off your breakeven calculations, so ensure you account for them accurately.

Other common variable costs for CPG brands include:

• Raw materials such as ingredients and components

• Packaging

• Distribution costs

• Promotional discounts

How Costs Influence Your Breakeven Point

Higher fixed costs mean you need to sell more units to break even, while higher variable costs decrease your contribution margin, which also pushes up your breakeven point. Precisely categorizing costs helps improve the accuracy of your company's financial forecasts.

Setting the Right Price to Reach Breakeven

Pricing plays a significant role in determining the breakeven calculation for CPG companies. The higher your price per unit, the fewer units you need to sell to break even. However, setting the right price means balancing market competition, production costs, and consumer demand.

How Pricing Affects Your Breakeven Point

Raising prices increases your contribution margin, helping you reach breakeven at a faster pace. However, this strategy requires careful consideration. In my experience, if you price your product too high, you risk alienating customers or pricing yourself out of the market entirely.

That's why it's important to calculate your breakeven point early in your business journey — and preferably before launching your product. Adjusting prices after you launch may prove difficult and damage your customer base.

Effective Pricing Strategies

Certain pricing strategies help speed up profitability for CPG start-ups. For instance, competitor analysis requires researching your competition to see how your prices compare and setting your prices accordingly. Cost-plus pricing adds a markup to your total costs to determine an appropriate price point, while value-based pricing sets prices based on the value customers place on your brand rather than simply on its costs.

Understanding Contribution Margin in Breakeven Analysis

Contribution margins play a vital role in the breakeven calculation for CPG companies. This term refers to the portion of each sale that contributes to covering fixed costs and generating profit. You can calculate it with the following formula or with this contribution margin calculator:

Contribution Margin = Price per Unit - Variable Cost per Unit

How Contribution Margin Affects Your Breakeven Point

A higher contribution margin reduces the number of units you need to sell to break even. Conversely, a lower contribution margin requires more unit sales to reach breakeven. Improving your contribution margin, whether by raising prices or reducing variable costs, may dramatically speed up the path to profitability for CPG start-ups.

Limitations of Breakeven Analysis for CPG Brands

While the breakeven point offers a powerful tool for CPG financial analysis, relying solely on this metric can leave you short in certain situations. For instance, unexpected increases in production costs due to inflation or supply chain disruptions may catch you off guard. Likewise, consumer demand may shift away from your product due to changing customer preferences or new product launches.

Over-Optimism in Cost Reductions

Many founders assume their unit costs will drop as they scale, expecting greater negotiating power with vendors. However, vendors are usually much larger than small CPG brands and hold most of the cards. I've found this negotiating power often proves difficult to achieve. Inflation affects everyone in your supply chain as well, so even if you manage to renegotiate better pricing, increases in other costs may erase any potential cost savings.

Using Breakeven Analysis to Guide Your CPG Business Strategy

Incorporating breakeven analysis for CPG brands into your financial strategy can help you make informed decisions about pricing, production, and profitability. But remember to regularly review your breakeven point to maintain an accurate picture of your finances, especially as your business scales or market conditions shift. 

Ultimately, using the breakeven calculation for CPG companies should comprise only part of your broader financial tool kit. Pairing the calculation with other important metrics like cash flow, inventory turnover, and gross profit margins provides better odds of keeping your company on track with financial reality.

When you need personalized guidance on implementing breakeven analysis for your CPG brand and learning about other financial strategies to help you grow, reach out to BBG for guidance. Explore our website for more articles about the financial management of your specialty food or beverage business, and schedule a consultation to learn more about financial modeling, variance analysis, and cost management.

Author Name: Maggie Ojeda

Author Bio: With 9 years of experience in finance, specializing in Financial Planning & Analysis (FP&A) and cost management, Maggie Ojeda is a trusted expert in delivering actionable financial insights. She spent 4 years at Grupo Peñaflor, one of Argentina’s top wine producers, where she developed a deep understanding of the wine industry’s financial complexities. 

Currently, as the FP&A Team Lead at BBG, she leads financial strategy for Napa Valley boutique wineries and emerging CPG brands. Her expertise in financial modeling, variance analysis, and cost management enables her clients to make informed, strategic decisions for business growth.