finance
Variable Costs
Costs that scale with sales volume. Materials, commissions, payment processing.
Definition
Variable costs rise and fall with revenue: cost of materials, sales commissions, payment processing fees, hourly contractor costs tied to delivery. They mostly live inside COGS. Variable costs offer flexibility - they shrink when revenue shrinks - but they also limit operating leverage. A pure-variable-cost business never goes bankrupt from low volume but also never gets dramatic margin expansion at scale.
In your business
- →Track variable cost per unit / per sale - it should stay flat or fall as volume grows
- →Renegotiate variable cost rates annually with major suppliers
- →When margin shrinks, it's usually variable cost creep, not fixed cost creep