Typically my audience is entrepreneurs and small business owners in general, but today I wanted to focus specifically on bloggers. I have been blogging for over a year and a half now, and have worked hard to turn my blog into a business. Many bloggers don’t start out with the mindset that their blog can be, and should be, considered a business. I have spent many, many hours on some of the top blogs about blogging, and gained tons of valuable advice, so this post is just a way to give back and hopefully help other bloggers out their turn their blog into a business.
As a follow up to my recent article that provided Example Financial Projections for a Startup, today I want to talk about how to calculate break even. I am going to use my ExecutivePlan blog as an example.
Break Even Analysis for a Blog
First, I realize that not all bloggers are business savvy, so let me define break even. Break even for a business is the point at which your revenue/sales is equal to your expenses. Each month you start out in the hole right? You have certain fixed expenses that you have to pay every month no matter what (Hosting costs, Email Autoresponders, Accounting Software Fees, etc). If you ever intend to turn your blog into a business, it is important for you to know how much you need to sell each month just to break even.
To follow along with me, you can download this excel template that I produced to perform a break even analysis on my blog - Breakeven Analysis for a Blog
Step 1 – Estimate Sales
The first step is to estimate sales. I could write for days about how to estimate revenue for a blog, and still not cover 1% of what should be considered when projecting sales for a blog.
In this example, I took the easy way out and just took the sales that I am currently generating through each product, and applied a 10% monthly growth rate. I sell digital products through this business, so I did not have any sales projections for services. Once you have your monthly sales projections in number of units, and the sales price per unit entered into the template you need to determine the variable cost per unit.
Step 2 – Variable Cost Per Unit
A variable cost is a cost that you only incur if you sell a product or service. This might include:
- Payment Processing Fees
- Sales Commissions
- Raw Material Costs
- Executive Summary Toolkit – PayPal will charge me 50 cents for a $4 transaction, and I have an agreement with my partner that 10% of revenue is his, so when I sell a $4 product, another 40 cents goes to him. That gives me a total of 90 cents in variable cost per unit.
- Amazon Ebooks – The next 3 products are all ebooks that I sell on Amazon. Amazon will take a 30% commission, and again I have a 10% commission to my partner, so my variable cost per unit is 40% of the sales price.
- Ultimate Business Plan Toolkit – I sell a business plan toolkit product that I partnered on with Optimus Business Plans. 50% of the sale goes to Optimus as a commission, and then I pay what amounts to a 2% fee to PayPal, and a 10% commission to my partner.
- Google Adsense – Lastly, I have an ad on the left side of my blog that generates a small amount of revenue for me. I know that Google takes their cut from each click before I ever see it, so my only variable cost is the 10% commission to my partner.
Step 3 – Fixed Costs
Now the next piece of the puzzle that we need in order to calculate your break even for your blog, is your fixed costs. For a blog I would assume you will have certain expenses like:
- Website Hosting
- Accounting Software Fees
- Email Autoresponder Software
- Graphic Design Fees
- Domain Name Costs
- Salaries (if you have employees)
Step 4 – Gross Profit
Now I am moving on to the second tab of the spreadsheet that I provided for you. You need to determine what your gross profit is each month based on your sales projections, and variable costs. Gross profit is simply Sales – Variable Costs. In the table below you can see the gross profit numbers for the first four months.
Step 5 – Daily Gross Profit
Now that I have total Gross Profit for the month, I can simply divide by 30 days and come up with daily gross profit. As you can see in the first month, my daily gross profit is $12.
Step 6 – Days to Break Even
The final step to determine when you break even each month is to take your total fixed expenses which we calculated in Step 3 and divide that dollar amount by Daily Gross Profit. That will give you the number of days it will take you to break even. In my projection, it takes 23 days to break even in the first month. By month 12 of the projection I break even on Day 9.
Now it doesn’t mean much to you if you do this once and never touch it again. You know that your blog is constantly changing. Maybe Google gives you a major boost in traffic and all of your old projections are out the window. Or maybe your expenses increased dramatically in month 3. You should set this template up and then make changes as your business changes. You can play around with the model and change your pricing to see how that impacts your break even point.
For bloggers, or business owners in general, working through a break even analysis is important. You may find out that you are actually losing money each time you sell a particular product or service. You will also be able to determine which products and services are most profitable for you, so that you can focus your sales efforts accordingly. Good luck!
About the Author: Adam Hoeksema is the Founder of ExecutivePlan. ExecutivePlan helps entrepreneurs write powerful business plan executive summaries in order to raise capital.