What is the 'Breakeven Price'
Breakeven price is the amount of money for which an asset must be sold to cover the costs of acquiring and owning it. It can also refer to the amount of money for which a product or service must be sold to cover the costs of manufacturing or providing it. In options trading, the break-even price is the stock price at which investors can choose to exercise without incurring a loss.
BREAKING DOWN 'Breakeven Price'Breakeven prices can be translated to almost any transaction. For example, the breakeven price of a house would be the sale price at which the owner could cover the home's purchase price, interest paid on the mortgage, hazard insurance, property taxes, maintenance, improvements, closing costs and real estate sales commissions. At this price, the homeowner would not see any profit, but also would not lose any money.
Breakeven Price Formula
Breakeven price is mathematically the amount of monetary receipts that equal the amount of monetary contributions. With sales matching costs, the related transaction is said to be breakeven, sustaining no losses and earning no profits in the process. To formulate breakeven price, a person simply uses the amount of the total cost of a business or financial activity as the target price to sell a product, service or asset, or trade a financial instrument with the goal to break even. For example, the breakeven price for selling a product would be the sum of the unit's fixed cost and variable cost incurred to make the product.
Breakeven Price Strategy
Using breakeven price as a business strategy is mostly common in new commercial ventures, especially if a product or service is not highly differentiated from those of competitors. By offering a relatively low breakeven price without any margin markup, a business may have a better chance to gather more market shares, even though this is achieved at the expense of making no profits at the time. Being a cost leader and selling at breakeven price requires a business to have the financial resources to sustain periods of zero earnings. However, after establishing market dominance, a business may begin to raise prices when weak competitors can no longer undermine its higher-pricing efforts.
Breakeven Price Effects
There are both positive and negative effects from transacting at breakeven price. In addition to gaining market shares and driving away existing competitions, pricing at breakeven also helps set an entry barrier for new competitors to enter the market. Eventually, this leads to a controlling market position, due to reduced competitions. However, a product or service's comparably low price may create the perception that the product or service may not be as valuable, which could become an obstacle to raising prices later on. In the event that others engage in a price war, pricing at breakeven would not be enough to help gain market control. With racing-to-the-bottom pricing, losses can be incurred when breakeven prices give way to even lower prices.