The numbers on one page: price, costs, margin and break-even

Many small businesses fail not because nobody likes the product but because every sale quietly loses money. A one-page set of numbers tells you how much each sale really earns and how many sales you need before you stop losing money.

Two kinds of cost

• Variable costs go up with every unit you sell: materials, packaging, printing, delivery, payment fees.
• Fixed costs stay the same whatever you sell in a period. The US Small Business Administration (SBA) gives examples such as rent, salaries, insurance and interest; for a student business they might be a market stall fee, a website plan or a software subscription.
• The SBA also separates one-time start-up costs (equipment, a logo, permits and licences) from monthly costs, and suggests asking mentors, suppliers and similar businesses what things really cost.
• List every cost, including small ones such as card payment fees, bags, delivery and your own travel. Forgotten costs are where profit disappears.

Price, contribution and margin

• The SBA defines contribution margin as 'the difference between the price of a product and what it costs to make that product'. Per unit, that is price minus variable cost.
• As a percentage, the SBA's formula is: contribution margin = (sale price per unit minus variable cost per unit) divided by sale price per unit.
• Do not confuse margin with markup. Margin is profit as a share of the price; markup is profit as a share of the cost. They give different percentages for the same sale.
• For how to price your own time and services, see the Earning Money module's lesson on pricing your skills. This lesson focuses on selling products.

Worked example: printed tote bags

• You plan to sell printed tote bags at a university market. Price: AED 40. Variable cost per bag: blank bag AED 12, printing AED 8, packaging AED 2, so AED 22 in total. These are example figures to show the method, not market prices.
• Contribution per bag = 40 minus 22 = AED 18. Contribution margin = 18 divided by 40 = 45 per cent. Markup = 18 divided by 22, about 82 per cent.
• Fixed costs for the month: stall fee AED 150 and a design app subscription AED 60, so AED 210.
• The SBA's break-even formula is fixed costs divided by (price minus variable cost). Here: 210 divided by 18 = 11.7, so you need to sell 12 bags to break even.
• Check it: 12 bags bring in AED 480. Variable costs are 12 x 22 = AED 264. Contribution is 480 minus 264 = AED 216, minus fixed costs of 210 leaves AED 6 profit. Bag 13 onwards earns AED 18 each.

What discounts really cost

• Suppose you cut the price by 25 per cent to AED 30. Contribution per bag drops to 30 minus 22 = AED 8.
• Break-even becomes 210 divided by 8 = 26.25, so you now need to sell 27 bags, more than double, just to cover costs.
• A small cut in price can mean a big cut in profit. Before discounting, work out how many extra sales you would need.
• Raising the price is often less risky for a small business than cutting it, as long as customers see the value. Test a higher price with your next small batch.

Your one-page business model

• Write one line for each: the customer (who exactly), the problem, your offer, how customers will find you, the price, the variable cost per unit, the monthly fixed costs, and the break-even number.
• Add your own time. If the 12 bags take 10 hours to design, print and sell, AED 6 profit is not a business yet. Decide whether this is a learning project or must pay you.
• Paul Graham's advice to founders is to 'spend as little money as possible' and to 'aim for cool and cheap, not expensive and impressive'.
• Keep every receipt and record every sale in a simple spreadsheet from day one. If you register a business later, you will need these records.
• Update the page after every experiment. The numbers will change as you learn real costs.