The new product is evaluated with two simple calculations before it's launched. The first is the contribution margin: how much you have left from each unit sold after subtracting its direct costs. The second is the break-even point for the new line only—how many units must be sold for the line to cover its additional costs. If both look convincing, the product launches with confidence. If not, the price or costs are adjusted on paper, where it's free, not in the market, where it's expensive.
The unit contribution margin is calculated by subtracting the unit's variable cost from the selling price. Variable costs include raw materials, packaging, and any expenses incurred only when a unit is sold. This margin shows how much each sale contributes to covering fixed costs and generating profit.
The break-even point for the new line uses only the additional fixed costs that this line incurs. Not the rent for the entire facility, not the existing wages, only what's added because of the new product. Additional hours, a new device, more energy, a bit of advertising. This breakdown is essential, because the new product is judged by the burden it brings itself, not by the old burden of the business.
Keith Cunningham advises in The Road Less Stupid that you set aside thoughtful time before any launch, with questions written on paper. For a new product, the two questions above are precisely that thoughtful time, turned into numbers.
A bar in Tirana will add breakfast, with a simple offering of coffee, croissants, and juice. The planned menu price is 350 LEK. Variable costs per order—coffee, croissant, juice, and packaging—amount to 150 LEK. The contribution margin is 200 LEK per order.
The breakfast line incurs additional fixed costs. A helper for the morning hours and basic energy and supplies amount to 60,000 LEK per month. The break-even point for the line is 60,000 divided by 200, so 300 orders per month. With 26 working days, that's about 12 breakfast orders per day.
Now the decision has a face. Do you believe the venue brings in 12 breakfast customers a day? If the area has offices and morning foot traffic, it's very likely, and every order above 300 brings the bar an extra profit of 200 LEK. If the area wakes up late, maybe the price needs to be revised, or the additional fixed costs should be cut—for example by covering breakfast with the existing staff. This whole discussion took place on paper, without risking a single lek.
This page covers the new product. The way pricing is generally constructed—with costs, margins, and positioning—is explained on the pricing and margin page at the Control level. There you'll also find the margin worksheet, which is used the same way for every new line.
The decision on the new line is made based on incremental costs, not on allocated costs. Allocating existing rent or wages to the new line distorts the decision, because those costs exist with or without the line. The break-even point formula for the line is incremental fixed cost divided by the unit contribution margin. For a full evaluation, two adjustments are added. The first is cannibalization, the portion of new sales that shifts away from existing products, which is estimated by the lost margin of the old product. Second, a sensitivity test with a lower price of 10% and a higher variable cost of 10%, which shows how fragile the plan is. If the break-even point in the worst-case scenario falls above the actual sales capacity, the line is remodeled before launch.
A low starting price only makes sense if the contribution margin remains positive and a subsequent price increase is realistic. A price that's hard to raise because customers get used to it. More often, the full price works with a temporary introductory offer.
Set a deadline and a threshold up front—for example, three months and the breakeven point. A written decision beforehand protects you from the tendency to keep going just because you've already invested. This is the sunk-cost trap that Kahneman describes.
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