KPI of the Day – Sales: # Time to break-even
Definition
Measures the average time period between the launch of the new product and when it starts to make a profit.
Purpose
To indicate the average time taken for the investment in the development of a new product to be recovered from the profits generated by the sale of the new product.
Recommendations
The break-even analysis is essential for any investment, whether it is about opening a new business, buying stocks, or launching a new product on the market. The moment the break-even point has been reached, the investment has been covered and profit is foreseen. Provided that the longer the break-even time, the higher the risk to slack on returns, assessing this KPI is critical for every new venture.
With selling products or services, it is recommended to determine the volume of products or services which need to be sold in order for the company to reach the break-even point. In doing this, monthly targets are generally set, and selling efforts are attuned to the targets set. Missed targets signify that the estimated period of time until the break-even point is reached, will increase.
In order to avoid such instances and keep the # Time to break-even at adequate levels, further recommended practices include:
- Increasing sales of the newly launched product line through cross-selling by linking it to other, already established and successful products;
- Raising the unit price if the elasticity allows it, especially after undertaking benchmarking activities with a view on similar types of products;
- Reducing the number of fixed costs for which there is a great number of possible actions, i.e. outsourcing services to experienced companies which can obtain better results with lesser resources.
In addition to all of this, one final aspect to be kept in mind is that having shorter break-even points is crucial for any new venture, entrepreneur, or established company launching new products onto the market since this indicates when a business will become financially sustainable. This particular KPI indicates the commercial success of Research and Development (R&D) output, being also an indicator of the sales department’s performance in pushing new products.
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