The cost category that breathes with the business. Variable costs grow when you grow and shrink when you shrink - which makes them easier to forecast and a natural shock absorber in downturns.
Definition
Variable Costs - expenses that scale up or down with revenue or activity level. Cost of goods, payment processing fees, contractor work, shipping, hourly labor, sales commissions.
Common uses
- Forecasting - expressed as a percentage of revenue and projected as revenue grows
- Contribution margin - revenue minus variable costs = contribution margin per unit
- Pricing analysis - knowing variable cost per unit informs minimum viable pricing
Watch out
A drifting variable cost ratio (cost of goods rising from 35% to 38% of revenue, for example) is one of the most reliable early warnings of margin compression.