Not all costs are created equal. Some you pay no matter what. Others only happen when you make a sale. Understanding the difference is critical for pricing and profitability.

Fixed Costs: Pay Them Rain or Shine

Fixed costs don't change with sales volume (in the short term). You pay them whether you sell 0 units or 10,000.

Common fixed costs:

• Rent and utilities
• Salaries (not commission-based)
• Insurance
• Software subscriptions
• Loan payments
• Marketing retainers
• Equipment leases

Example:

Your shop rent is £2,000/month. Whether you sell £1,000 or £100,000 worth of product, rent is still £2,000.

Variable Costs: Only Pay When You Sell

Variable costs scale directly with sales. No sales = no variable costs. Double sales = double variable costs.

Common variable costs:

• Raw materials
• Product packaging
• Shipping and delivery
• Payment processing fees (% of sale)
• Sales commissions
• Manufacturing labor (per unit)
• Marketplace fees

Example:

Each candle costs £3 in materials. Sell 100 candles = £300 in materials. Sell 200 candles = £600 in materials.

Why It Matters for Break-Even

Your break-even point depends on covering fixed costs through the contribution margin (price - variable cost).

Coffee shop example:

• Fixed: £5,000/month
• Variable per coffee: £1.50
• Price: £4.00
• Contribution: £2.50
• Break-even: 2,000 coffees

If you raise the price to £4.50:

• Contribution: £3.00
• New break-even: 1,667 coffees (333 fewer!)

If you cut rent to £4,000:

• Break-even: 1,600 coffees (400 fewer!)

Lesson: Reducing fixed costs or increasing contribution margin both lower break-even, but they work differently.

The Gray Area: Semi-Variable Costs

Some costs have both fixed and variable components.

Utilities:

• Base charge (fixed): £50/month
• Usage (variable): £0.15 per kWh

Labor:

• Base salary (fixed): £2,000/month
• Overtime (variable): £25/hour over 160 hours

Phone:

• Monthly plan (fixed): £30
• International calls (variable): £0.20/min

For break-even analysis, split these into their fixed and variable components.

How This Affects Profitability

High fixed costs = high risk, high reward

• Need significant sales to break even
• But profit scales rapidly after break-even
• Example: Software (low variable costs)

High variable costs = lower risk, slower profit

• Break even faster
• But profit grows more slowly
• Example: Retail (high cost of goods sold)

Ideal: Low fixed costs + low variable costs = easy profitability

Strategies Based on Cost Structure

If you have high fixed costs:

• Focus on volume and capacity utilization
• Invest in marketing to drive sales
• Price for maximum revenue

If you have high variable costs:

• Focus on efficiency and waste reduction
• Negotiate better supplier rates
• Consider premium pricing

If you have low costs overall:

• You have flexibility to experiment
• Can compete on price if needed
• Invest profits in growth

The Bottom Line

Fixed costs are your baseline burn rate. Variable costs determine your margin. Together, they define your break-even point and profit potential.

Use our calculator to model different fixed and variable cost scenarios.