Variable costs

Costs that rise and fall directly with each additional unit sold — payment fees, per-seat API costs, shipping, delivery labour.

Example

Stripe's fee on every transaction, or the cloud cost of one more active account.

Important

The split between fixed and variable is a judgement, not a fact, and founders consistently classify their own time as neither. If a human must do work per customer, that time is variable whoever absorbs it.

Related terms

• Fixed costs — Costs that do not change with sales volume in the short term — rent, salaries, software subscriptions, insurance.
• Contribution margin — Revenue from a unit minus all the variable costs of producing and selling that unit — a step beyond gross margin because it also includes variable selling costs.
• COGS (Cost of Goods Sold) — The direct costs of delivering your product — the costs that rise with each additional customer.
• Contribution margin ratio (CM ratio) — Contribution margin as a percentage of revenue: (Revenue − Variable costs) ÷ Revenue. The share of every sales dollar left over to cover fixed costs and then become profit.

Lessons that explain it

• Fixed and variable costs — The split that decides what happens when you grow, shrink, or have a bad quarter. Most founders classify their own time as neither, and that is where the trouble starts. (11 min)
• Contribution margin and the CM ratio — How much of each sale is left to cover everything else. One number, and it answers most of the questions founders take to spreadsheets. (13 min)

All 176 terms in the Founder glossary