Archive for February, 2010

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Sport Management and the Winter Olympic Games: Vancouver 2010

Friday, February 26th, 2010

What can we associate Olympic Games with, and what is the importance and place of the Olympic Games among other sport competitions?

If asked these questions to the large public some would say that Olympic Games is the oldest and most important sport competition taking place every four year. Others would say that is a celebration of sport, joy and peace between nations. While some would acknowledge the huge economical benefits and recognition, such a competition can bring for the organizing nation of the Games.

Without no doubt all of these remarks are right. But what can we add more is that Olympic Games above all  is a celebration of olympism and performance.

Starting from this last remark let’s have a look at the most important drivers of a successful Olympic Games edition and how can be performance in regards with such an event be best pictured?

Just a few days ago a new edition of the Winter Olympic Games, has witnessed its 21st opening with a grandiose ceremony in Vancouver, Canada. It was for the first time in the history of Olympic Games when an opening ceremony was held in an enclosed stadium. And it was for the first time in the history of Winter Olympic Games when more than 60.000 thousand spectators were present in the stadium premises for the opening ceremony and other 3 billion watched it from behind the TV screens.

If looking only at these figures and we couple them with athletes performance during olympic competitions we could say that the Winter Olympic Games, Vancouver 2010 should be considered a big success. But is that right?

Beyond the unprecedentedly media coverage of the event, beyond the athletes’ performance there are a lot of other factors that play an important role in the success of an Olympic Game edition. All of them are enabled by Sport Management as a business discipline. When applied well, it secures the success of a competition from both a sportive and administrative point of view. Listed below are some performance measures and their related figures which portrait Vancouver Winter Olympic Games 2010 edition from a performance management perspective:

• # Viewers per televised sport event: 34,5 million Americans viewed the opening ceremony in prime time, 2 out of 3 Canadians watched the event and overall it was projected that more than 3 billion people witnessed the opening event from behind the TV screens around the world.

• # Event tickets available: 1, 6 million tickets

• # Volunteers supporting the sport: 25,000 volunteers are supporting the Vancouver 2010 Olympic event (approximated figure)

• # Athletes and officials attending competition: More than 5,500 Olympic athletes and officials (approximated figure)

• # Countries participating in the sport event:  82 countries have qualified athletes and are attending the event.

• # Accredited media representatives:  10,000 media representatives have been accredited for different events during the Olympic Games (approximated figure)

• # Medal events during the competition: 86 medal awarding events held during the 16th days of competition.

• $ Sport event operating cost: $ 1, 76 billion estimated costs

• $ Sport event security costs:  $ 900 million estimated costs

• $ Athletes accomodation facilities development cost:  $ 167 million estimated cost of the Vancouver Olympic Village

• $ Venues renovation costs:  $ 365 million estimated renovation cost of the Olympic venue

• # Distance travelled by the Olympic torch:  45,000 kilometers across Canada

• # Olympic torch bearers: 12,000 Canadians were given the occasion to bear the Olympic torch

• # Olympic torch  relay duration:  106 days.

As we can acknowledge from the figures listed above the organization of an Olympic Games edition implies a great effort and resource allocation. However its success can be determined with precision only at its end, and what we have presented above is just a fraction of the performance indicators that can portrait a sport event. For more performance measures from sport management industry visit the smartkpis.com database.

Additional resources:

References:

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Applying Goal Setting Theory in practice: An action research exercise

Thursday, February 25th, 2010

smartKPIs.com Performance Architect update 8/2010

In my previous updates I highlighted the importance of theory in performance management and introduced the goal setting theory as one of the most important informing the discipline. I also outlined the importance of understanding the complexities of setting targets.

At smartKPIs.com, we not only enjoy thinking and talking about performance management, but we also apply performance management concepts in our own work. Today’s update illustrates how goal setting theory was used in practice by the smartKPIs.com team through an action research exercise.

Situation: At the beginning of November 2009, the database of performance measures on www.smartKPIs.com had 600 published KPI examples. The growth rate of the database was constant in November and December, however limited and not optimized..

Challenge: To make the website content more relevant to the diverse profile of visitors, we needed to accelerate the rate at which new KPI examples were published.

Methodology: apply the Look, Think and Act routine of Action Research (Stringer, 2007)

  • Look – we gathered relevant information and developed a rich picture of the various functional areas and industries part of the smartKPIs.com taxonomy.
  • Think – we analyzed the documentation process and clarified the issues to be addressed
  • Act – we established a plan, implemented it and evaluated results

Theory: use Goals Setting Theory principles (Locke & Latham, 1990)

Application of Goal Setting Theory principles:

  • Challenging but attainable. We established an overall target for the entire documentation team: Double the number of published KPIs in one month. From 1000 at the end of December 2009 to 2000 published KPI examples by the end of January 2010.
  • Specific rather than vague. We were aware that such a challenging target might lead to a decrease in the quality of the content. This risk was addressed by clarifying that the target had to be achieved while respecting the high quality standards characterizing the KPI examples documented on http://www.smartKPIs.com. This was reinforced by the establishment of work package with clear quality and quantity specifications.
  • Involvement of team members in the process of setting their own targets. We decided to split this target by working days and established the daily target number of KPIs for the team. This was divided by team member, taking into account the proportion of working hours allocated to this task each day. These targets were discussed and some of the team members adjusted them upwards, based on the level of difficulty of their allocated work package.
  • Ensure targets are measurable in terms of being clearly understood by employees: quantity, quality, time and cost. A spreadsheet was established to clarify daily targets and keep track of the progress. Weekly meetings were used to discuss progress, share learnings and adjust work packages.

Results:

  • January 2010 – The target was met on the last day of the month: 1000 KPI examples were published in a 4 weeks period, as planned.
  • February 2010 – The target was met one week before the deadline, confirming that the previous month result was due to an improved process, easily replicated from one period to another.

Outcomes: Performance management is more than just ensuring outputs are delivered as planned. It is also about using such outputs to deliver outcomes that generate added value. Here is how the output of 2000 KPIs published as planned during the last two months is generating value for smartKPIs.com:

  1. The traffic to http://www.smartKPIs.com increased considerably. In February 2010, smartKPIs.com established a new site record in terms of daily visitors.
  2. The traffic to the website remained constant even after stopping the advertising campaign we rolled out last year. After a brief decrease, the volume of visitors started to gain momentum. While other factors contributed to this, certainly the quality content published over the last two months, had its share in attracting new visitors. Thus the financial value generated by the added content can be estimated as the equivalent of a large share of our advertising budget for two months.
  3. The continuous improvement of the quality and quantity of the content consolidated the recognition smartKPIs.com has started to have the international performance management community as a global platform for performance management knowledge integration.
  4. Internally, the learning experience team members shared during this exercise contributed to the generation of new ideas and innovation, such as the launch of the Performance Management IQ test.
  5. The experience itself and the achievement of targets confirmed the talent, dedication and work ethic of the smartKPIs.com team. It gave a sense of pride and satisfaction of getting the job done. Having the opportunity to plan, deliver and excel is in itself a powerful motivator and enabler of self efficacy. It is a story worth telling others: “…In December 2009, while working with the smartKPIs.com team on growing the website, we were faced with this challenge…We were a great team…And we did exceptional things…”

After all, as Albert Einstein said: “The value of achievement lies in the achieving.”

Notes:

  • No bonuses were paid for achieving the targets set as part of this exercise.
  • No paper was printed as part of the measure documentation process.

Stay smart! Enjoy smartKPIs.com!

Aurel Brudan
Performance Architect,
www.smartKPIs.com

References

Locke, E. A., & Latham, G. P. (1990). A theory of goal setting and task performance. Englewood Cliffs, NJ: Prentice Hall.

Stringer, E. T. (2007) “Action Research, 3rd Edition“, Thousand Oaks, CA, Sage Publications.

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Measuring company profitability with the Berry ratio

Wednesday, February 24th, 2010

Companies use profitability ratios in order to measures their ability to generate returns through effective allocation and use of available resources. KPIs in this area have often as main component profit or return. One of the most popular profitability ratios is the Berry ratio.

It was developed by Dr. Charles Berry (1930-2007), a specialist in industrial organization and applied microeconomics and professor at the Princeton University, in conjunction with a tax court case involving transfer pricing between a U.S. parent company and a foreign subsidiary. He consulted with dozens of government agencies, corporations and law firms on antitrust and regulatory matters, transfer pricing and corporate taxation before launching the ratio that carries his name.

The Berry ratio measures the ratio of a company’s gross profits to operating expenses and is used mostly by tax and transfer pricing analysts.

It is calculated by dividing $ Gross margin (which is basically the difference between $ Sales and $ Cost of goods sold) to the $ Operating expenses.

A ratio coefficient of 1 or more indicates that the company is earning a profit over and above its variable expenses; a coefficient below 1 indicates that the firm is losing money.

Although the Berry ratio is a simple profitability measure, it is probably one of the most misused ratios in analysis of transfer pricing. Due to failure in understanding its limitations, errors in interpreting it may appear. The Berry ratio cannot be applied to distributors that also perform manufacturing functions as it cannot capture the additional return earned by the manufacturing function.

Empirical studies have shown that distributors with low operating expense intensity (less than 10%-15% relative to sales ratios) show very high values of the Berry ratio when compared with distributors with higher operating expenses. Thus, an extra caution should be taken when comparing two distributors with a large gap between their operating expense intensities.

Using the Berry ratio together with other profit level indicators will provide a higher level of validity of the information.

Additional resources

smartKPIs.com library of KPIs: Finance > Profitability > # Berry ratio

Przysuski, M.,Lalapet, S. (2005), “A comprehensive look at the Berry Ratio in transfer pricing”, Tax analyst, Volume 40, Number 8, Reprinted from Tax Notes Int’l, November 21, 2005, p. 759, available at: http://www.bridging.uwaterloo.ca/mtax/documents/PrzysuskiM_BerryRatioPaper.pdf (accessed 24 February 2010)

Stevens, R. (2007), “Charles Berry, economist and ‘dedicated University citizen,’ dies”, Princeton Weekly Bulletin   September 16, 2007, Vol. 97, No. 1, available at: http://www.princeton.edu/pr/pwb/07/0916/berry/ (accessed 24 February 2010)

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Measuring Supply Chain Management Performance

Tuesday, February 23rd, 2010

Supply Chain Management (SCM) is the systemic, strategic coordination of the traditional business functions and the tactics across these business functions within a particular company and across businesses within the supply chain, for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole (Mentzer et al, 2001).

There are more aspects to consider when having a business line in Supply Chain Management, such as distribution strategy and network configuration, logistical and warehousing activities, inventory management and reverse logistics.

When considering specific Supply Chain Management activities and specific performance measures, these can be grouped in different subcategories.  www.smartKPIs.com suggests the following subcategories and specific performance indicators for Supply Chain Management:

Logistics / Distribution:

Inventory Management:

Procurement / Purchasing:

Contract Management:

Supply Chain Management:

To access over 300 Supply Chain, Procurement, Distribution KPI examples visit www.smartKPIs.com

References

Mentzer, T.J. , (2001), Supply Chain Management,  Sage Publications Inc., London

eab group (2010), “KPI examples for the Supply Chain Management”, http://www.smartkpis.com/kpi/functional-areas/supply-chain-procurement-distribution (accessed 10 February 2010)

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Measuring advertising performance: a recommended set of 8 media metrics

Monday, February 22nd, 2010

As part of the promotion mix in marketing, advertising is one of the most dynamic and costly promotional activity. Although declined with about 2,6 % by comparison to the previous year, the U.S. advertising expenditure has still been above $ 130 billion dollars in 2008 (according to a The Nielsen Company report).

Performance management in advertising focuses on various levels, from research and planning the advertising campaign, to implementation and results assessment. Herein, when choosing the appropriate media for message deployment, several media metrics ought to be tracked in order to have an accurate view of the expected coverage and impact of the media program.

For a complete assessment of the media chosen, the most popular media metrics used in advertising are the following:

  1. Begin with the estimation of the # Advertising reach. Reach is the volume of the audience to whom the communication is directed. However, reach does not indicate the number of individuals or household the ad will actually be exposed to, it only reflects the potential actual exposure considering the number of households that have access to that media.
  2. For the individuals or the households that form the # Reach, calculate the average number of times they are exposed to the advertisement. You will then obtain the # Frequency metric.
  3. Having estimated # Reach and # Frequency, you can now calculate the # Opportunities-to-see, as the result of # Reach multiplied to # Frequency. # OTS is also called # Impressions and it reflects the total number of ad exposures as a function of unique individuals exposed and the number of times each individual has the chance to see the ad. In audio media, the # OTS is equivalent to # Opportunities-to-hear, reflecting the total number of ad exposures as a result of individuals exposed multiplied to average chances to hear.
  4. Further on, extracting from the total available impressions the percentage that is actually delivered by the media vehicle generates the # Rating points. One rating point means that one percent of the audience actually sees the ad.
  5. Adding up all rating points during campaign will result in the # Gross rating points, this measuring the total exposure the ad receives. However, if the ad is broadcast in a show with 10 rating points and also in one with 15 rating points, it does not mean that 25 % of the audience sees it because some viewers may see it both times.
  6. If the ad targets a particular group in the audience for that media (i.e women under 35 years), you will then use # Target rating points, which is the rating points considered for that particular group in the audience.
  7. Finally, after having quantified the audience, you will have to calculate your costs in order to make a decision of what media and show to choose for ad deployment. The metrics most commonly used is the $ Cost per mille (CPM), also called $ Cost per thousand, which is the cost to reach 1000 impressions. For calculation, you will have to divide the ad campaign cost to the number of impressions generated.
  8. In relation to $ Cost per mille, advertisers can also use the $ Cost per point (CPP), that equals the advertising cost divided to the number of rating points achieved.

To sum up, we have the following ad metrics:

For further Key Performance Indicator examples used in advertising practice, you can visit the smartKPIs.com KPIs in Advertising page.

A particular set of ad metrics refer to social media performance management, an area with an outstanding dynamic. Stay tuned on smartKPIs.com blog for a future post on social media metrics.

References:

Faris et al. (2006), Marketing Metrics: 50+ Metrics Every Executive Should Master, Wharton School Publishing, Upper Sadle River New Jersey.

„U.S. Ad Spending Fell 2.6% in 2008, Nielsen Reports”, available at: http://en-us.nielsen.com/main/news/news_releases/2009/march/u_s__ad_spending_fell (accessed 20 February 2010).

Further recommendations:

Measuring Advertising Performance 2010 Conference in London, UK.

Atlas Advertiser Suite of advertising measurement technologies from Microsoft.

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Trade Logistics in the Global Economy – World Bank Group 2010 report

Sunday, February 21st, 2010

Improving logistics performance has become an important development policy objective in recent years because logistics have a major impact on economic activity.

Connecting to Compete 2010: Trade Logistics in the Global Economy is a global report launched in 2010, by the World Bank Group, providing a comprehensive look at the trade logistics performance worldwide. This is the second edition of the report  and it is based on a global survey of important international freight forwarders and express carriers.

“Economic competitiveness is relentlessly driving countries to strengthen performance, and improving trade logistics is a smart way to deliver more efficiencies, lower costs and added economic growth,” said World Bank Group President Robert B. Zoellick.

Accordingly to the survey realized on trade logistics by the World Bank Group, “the capacity of countries to efficiently move goods and connect manufacturers and consumers with international markets is improving around the world, but much more progress is needed to spur faster economic growth and help firms benefit from trade recovery”.

The Logistics Performance Indicators (LPI) is a comprehensive index created to help countries identify the challenges and opportunities they face in trade logistics performance. According to the LPI ranking, Germany is the top performer among 155 countries analyzed. The report indicates that the high income economies dominate the top logistics rankings, with most of them occupying important places in global and regional supply chains. By contrast, the lowest performing countries are almost all from the low and lower income groups.


The report ranks developing countries per region as it follows:

  • South Africa (28) is the top performer from Africa
  • China (27) from East Asia
  • Poland (30) from Central and Eastern Europe
  • Brazil (41) from Latin America
  • Lebanon (33) from the Middle East
  • India (47) from South Asia.

Further reading:

Viveros, A. (2010), “Global Trade Logistics Improving, But More Needed to Boost Recovery”

World Bank Group, Logistics Performance Index (LPI)

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Setting targets, cooking steak and using thermometers

Saturday, February 20th, 2010

smartKPIs.com Performance Architect update 7/2010

Setting targets is relatively easy if you want to make it easy – just pluck a number from the air, make it your target and strive to achieve it. However, there is more to target setting than a simple number selection.

One of the first things to be clarified when using target is why they are used. The answer might seem intuitively simple: to facilitate their achievement. Still, there are more reasons to using targets.

One of my favorite metaphors regarding using targets is the thermometer. Thermometers are used in multiple ways:

  • To check if the temperature is within certain limits. In medicine 37° Celsius / 98.6° Fahrenheit is considered the average healthy temperature of a healthy human body. In a way it can be considered a target, however a flexible one, based on a variance interval around it.
  • To ensure the temperature meets a specific value. For example, in cooking some dishes require a specific temperature to be reached as per the recipe. In this case, meeting the target temperature is required for the successful preparation of the dish.

Similarly, in other aspects of human administration, such as business, targets can be set for multiple reasons:

  • To learn – targets provide a good reference point for evaluating achievement and comparing results.
  • To motivate their achievement – as per the principles outlined by the Goal Setting Theory
  • To control / ensure compliance – to verify the achievement of a specific limit required as part of the successful delivery of a business plan.

In time, the latter two reasons worked hand in hand to overshadow the learning aspect of target setting. They work fairly well in the short term and bonuses based on meeting short term targets have become the norm in business. However, their long term impact is in many instances less positive. The Global Financial Crisis is only an example of the manifestation in practice of this thinking.

Coming back at the thermometer metaphor is as we would use thermometers only to check the temperature of the steak we are cooking (satisfying our short term hunger), having forgotten to also using them to monitor the temperature of our body, for long term health benefits. In practice (medicine and manufacturing) this is not the case – thermometers used in equal measure for learning and ensuring compliance. In business administration it is as if we have forgotten about the learning aspects of target setting… Reward and recognition driven target setting is the norm.

The implications at cultural level are important. Targets for control in many instances result in a dangerous combination of human greed and mechanistic behavior. This combination, coupled with ineffective risk management is one of the factors that contributed to the demise of many organizations in recent history. Having a good steak is generally easier and more appealing than monitoring health and learning about ourselves.

Fortunately, the body has the ability to self regulate temperature. Organizations, on the other hand don’t have a mature self-regulation system, again mainly due to the relatively low level of sophistication of organizational culture today.  As a result rewards and recognition target setting seems to be a relic of 19th century management prehistory, a reflection of our inability to find the right balance in human organizations. After all, it took hundreds of years to evolve the thermometer to its current form. Scientific management has been around for less than 100. Maybe it is just a question of time.

Stay smart! Enjoy smartKPIs.com!

Aurel Brudan
Performance Architect,
www.smartKPIs.com

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Over 3000 Key Performance Indicator (KPI) examples on www.smartKPIs.com

Friday, February 19th, 2010

www.smartKPIs.com registered users can now select their Key Performance Indicators (KPIs) from over 3000 Performance Measures documented and published in the online repository. The team focused in the last few days on publishing examples of Human Resources, Finance, Accounting, Marketing & Communications and Supply Chain Management metrics. KPI examples specific to the Transportation and Infrastructure Operations industries were also added to the database.

The functional areas with the highest number of KPI examples are:

The industries with the highest number of documented performance measures are:

Example of a documented performance measure: # Compliments to complaints

User experience on http://www.smartKPIs.com

  • Learn: To learn more about performance management and Key Performance Management visit the Resources section.
  • Explore: To explore the library of KPI examples by navigating the functional area and industry directory, visit the Browse KPIs section.
  • Customize: To build your customized KPI library by saving favorite examples for later use, visit the My KPIs section.
  • Contribute: To propose a new example of KPI, visit the Submit KPIs section.
  • Collaborate: To collaborate with other users and to discuss KPI examples, add comments on each KPI description page.

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2009 Best and worst airport on time performance

Thursday, February 18th, 2010

Nothing is worst than having to wait in a crowded airport for hours and hours or miss your connection flight because of a delayed aircraft. Such situations can create a lot of frustration and tension among passengers and usually lead to a lot of headaches for the airline representatives.

According with an EUROCONTROL (The European Organization for the Safety of Air Navigation) research from 2007, the major factors responsible for aircraft delays in Europe were airlines which accounted for 55% of the total fallowed by airports’ ground personnel (12%), air traffic control (10%) and weather (10%).

The situation is even worse if we consider that an airline delay is very hard to redress and in most of the cases leads to reactionary delays throughout the airline network system.

Thus, faced with these situations, airline operators have to cope with an avalanche of complaints, find alternative traveling solutions, make reimbursements or pay damage compensations, which in the end can seriously affect the bottom line of the companies.

Therefore delivering the best in class on time performance becomes a major challenge and in the same time responsibility for both airport authorities who administer these congested points as well as for the airline operators who are directly involved in passenger transfers.

More than ever, on time performance is considered today one of the most important key factors to success for the airline industry. It is usually expressed by two important key performance indicators:

• % On time arrivals

• % On time departures

While some operators prefer to adjust the tolerance intervals, in general a flight is considered “on time” if it arrives or departs less than 15 minutes after its scheduled take-off or landing time. What is beyond this time landmark counts for the negative side of airline companies “on time performance”. Knowing the “hotspots” in the industry, the airports with the worst on time record, is important for both airlines and passengers, that can use this information as part of their risk management plans. In January 2010, the Forbes Magazine compiled a report presenting the ten most delayed airports in term of “on time performance” for both arrivals and departures (Forbes, 2010). A summary of the results is outlined below:

Worst departure ranking

Worst arrival ranking

For more details about the major factors that can influence airline industry performance, smartkpis.com (eab group, 2010) provides its users with a comprehensive library of performance measures such as:

• % Airport activity

• # Average minutes delayed for all flights

• # Average arrival processing time

• % Lost baggage on connection flights

• % Flights delayed due to technical issues

• % Flights delayed due to weather conditions

Additional resources

References

Forbes (2010), “The World’s Most Delayed Airports”, available at: http://www.forbes.com/2010/01/22/most-delayed-airports-business-logistics-airports_slide_2.html (accessed 17 January 2010)

eab group (2010), “KPI examples for the Airport and Airlines industries”, http://www.smartkpis.com/kpi/industries/transportation/airlines/pag3.htm and http://www.smartkpis.com/kpi/industries/infrastructure-operations/airports (accessed 17 January 2010)

To compile our list, we use information from FightStats, an aviation data company which compiles flight information from airports, airlines, flight reservation systems and other sources around the world. We considered flights at the world’s 200 busiest airports by passenger volume, according to Airports Council International’s 2009 World Traffic Report. We included only airports about which FlightStats has the most detailed information. That means that some airports, particularly large hubs in South America, weren’t considered for our list.

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Over 2900 Key Performance Indicator (KPI) examples on www.smartKPIs.com

Wednesday, February 17th, 2010

www.smartKPIs.com registered users can now select their Key Performance Indicators (KPIs) from over 2900 Performance Measures documented and published in the online repository. The team focused in the last few days on publishing examples of Accounting, Marketing & Communications and Supply Chain Management metrics. KPI examples specific to the Transportation, Postal and Courier Services industries were also added to the database.

The functional areas with the highest number of KPI examples are:

The industries with the highest number of documented performance measures are:

Example of a documented performance measure: % Forecast to actual inventory consumption

User experience on http://www.smartKPIs.com

  • Learn: To learn more about performance management and Key Performance Management visit the Resources section.
  • Explore: To explore the library of KPI examples by navigating the functional area and industry directory, visit the Browse KPIs section.
  • Customize: To build your customized KPI library by saving favorite examples for later use, visit the My KPIs section.
  • Contribute: To propose a new example of KPI, visit the Submit KPIs section.
  • Collaborate: To collaborate with other users and to discuss KPI examples, add comments on each KPI description page.

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When marketing meets finance: the break-even level of sales

Tuesday, February 16th, 2010

In a previous blog post we investigated the Return on Marketing Investment, a metric that analyzes the marketing activity from a financial point of view that is more complex than the revenue from sales generated by marketing.

The current blog post aims at exploring another area where finance meets marketing: the break-even analysis. In this area, we consider that finance actually needs marketing: the break-even analysis aims at determining from which point on (i.e. volume of sales), a business begins to generate profits.

Calculating the break-even level of sales is done by following the steps below:

  • Calculate your fixed production costs. These include the costs to produce that do not vary upon the volume of production and generally include the administrative costs (rent, secretary etc.)
  • Calculate the variable unit costs. These are costs that depend on the production volume (such as: salaries for the operational employees, utilities in the plant, raw materials etc.), that are divided to the volume of production to obtain the cost per unit.
  • Estimate the price that will be charged for each unit of the product or service. There are various price-setting strategies, such as adding a margin to the production costs, considering competition prices and even the break-even analysis itself can be used at setting the right price.

The break-even level of sales is then calculated as:

# Break-even level of sales = $ Fixed costs / ($ Price per unit – $ Unit variable cost)

The calculation formula is derived by the equation that reflects the zero profits:

$ Total revenue = $ Total costs

The result indicates the sales volume that needs to be achieved in order to attain the break-even – at which the revenues cover the costs, but no profits are obtained. From this sales level on, the business begins to generate profits.

After having calculated the break-even level of sales based on mostly financial inputs, the marketing department can estimate when and whether these levels of sales can be achieved and in which conditions.

Thus, the contribution of the break-even level of sales is considerable in what regards several financial decisions:

  • Finding the optimal fixed to variable costs combination
  • Comparing the estimated profitability of various options for investment
  • Setting optimum price levels

To take the analysis a step further, finance managers can even set targets for the profits they intend to achieve and calculate the expected level of sales that would generate these profits. This is done by adjusting the break-even calculation to include the profit targets, meaning we will now calculate the level of sales that will generate an expected amount of profits, not zero profits (as in the case of the break-even level of sales):

# Target volume = ($ Fixed costs + $ Profit) / ($ Price per unit – $ Unit variable cost)

For further reading and examples of calculating the break-even level of sales, you can follow:

Break-Even Analysis, Weatherhead School of Management

David Kinard (2009), Metric Monday – How Much is that Marketing Effort Worth?

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