01 Contribution: what each sale adds
Contribution per unit = selling price − variable cost per unit. It is the amount each sale adds towards your fixed monthly costs.
Break-even units = monthly fixed costs ÷ contribution per unit. Below this you lose money; above it every extra sale adds its full contribution as profit.
Example (hypothetical numbers, not data): fixed costs are ₹60,000 a month (rent ₹15,000, wages ₹35,000, other ₹10,000). Each packet costs ₹30 in material and packing, and sells for ₹50. Contribution = ₹20. Break-even = ₹60,000 ÷ ₹20 = 3,000 packets a month. At 4,000 packets, profit = 1,000 × ₹20 = ₹20,000.
02 Cost-plus pricing
Cost-plus means: work out your full cost per unit, then add the margin you want. It makes sure every sale covers its share of costs, if you reach your planned volume.
Its weakness: it ignores what customers are willing to pay and what competitors charge. If your costs are high, cost-plus gives you a price nobody accepts.
Example (hypothetical numbers, not data): with the same numbers and a plan to sell 4,000 packets, full cost per packet = ₹30 + (₹60,000 ÷ 4,000) = ₹30 + ₹15 = ₹45. Adding a 20% margin gives ₹45 × 1.2 = ₹54.
03 Market pricing
Market pricing starts from the customer: what do similar products sell for, and what would buyers pay for yours? Then you check whether your costs leave enough contribution at that price.
If the market price leaves too little contribution, the answer is to cut costs, change the product or find a different buyer, not to hope for volume.
Example (hypothetical numbers, not data): competitors sell similar packets at ₹48 to ₹52. At ₹54 you may sell fewer than planned. At ₹48, contribution = ₹18 and break-even = ₹60,000 ÷ ₹18 = 3,334 packets (3,333.3 rounded up). That is 334 more packets than at ₹50, just to stand still.
04 The discount trap
A small discount cuts contribution by a much larger share, because it comes straight out of the margin, not out of the price as a whole.
- Know your break-even before you set a price.
- Use cost-plus as a floor and the market price as a reality check.
- Before giving a discount, work out the new break-even.
Example (hypothetical numbers, not data): 10% off the ₹50 price makes it ₹45. Contribution falls from ₹20 to ₹15, a 25% drop. Break-even rises from 3,000 to ₹60,000 ÷ ₹15 = 4,000 packets: you must sell one-third more just to cover fixed costs.