Fixed and Variable Costs
Date: 2026-08-16
Whether a cost moves with volume decides which decisions it belongs in. Get the split wrong and you’ll either refuse profitable sales or chase volume that costs more than it brings.
What it is
- Variable costs scale with units sold. Cost of goods, payment fees, packaging, per-order fulfilment, returns
- Fixed costs don’t, within a range. Rent, salaries, software, insurance
The test: would this cost change if we sold one more unit today?
one extra order at £50
variable goods £27.50 + fees £1 + packaging £1.50
+ fulfilment £3 + returns £2 = £35.00
fixed +£0
contribution = £15.00
That £15 is the whole basis for Contribution Margin and everything downstream.
Semi-variable and stepped costs
The real world is messier than the binary, and this is where reasoning goes wrong.
Semi-variable — a fixed component plus a variable one. A warehouse contract with a base fee plus per-pick charges.
Stepped — fixed until a threshold, then jumps:
cost
│ ┌────────
│ │
│ ┌────┘
│ │
├───┘
└────────────────── volume
1 2 3 warehouse staff hired
Warehouse headcount, customer service capacity, and platform tiers are all stepped. Treating a stepped cost as fixed is fine until you’re near a step, at which point the next tranche of growth carries a large one-off cost that per-unit thinking never surfaces.
Worth knowing where your steps are before forecasting volume growth.
Time horizon changes the classification
The distinction people miss: fixed and variable are relative to a period.
| Horizon | Warehouse staff | Rent | Software |
|---|---|---|---|
| This week | Fixed | Fixed | Fixed |
| This quarter | Semi-variable | Fixed | Fixed |
| Next year | Variable | Variable | Variable |
Over a long enough horizon almost everything is variable. So “should we take this order” uses a short horizon and counts almost nothing as fixed; “should we enter this category” uses a long one and counts almost everything.
Using the wrong horizon is the error. Short-horizon thinking applied to a strategic decision ignores the capacity you’d have to build; long-horizon thinking applied to a marginal sale refuses business that would have contributed.
What follows
Operating leverage. A high-fixed-cost business gains disproportionately from volume — every extra unit contributes and fixed costs are already covered — and loses disproportionately when volume falls. A high-variable-cost business is flatter in both directions and more resilient.
fixed costs £180,000/yr, contribution £15/order
break-even 180,000 ÷ 15 = 12,000 orders
actual 15,000 orders
profit (15,000 − 12,000) × 15 = £45,000
At 15,000 orders, a 10% volume increase adds £22,500 of profit — a 50% increase, because fixed costs are already covered. That asymmetry is why growth is so valuable near break-even and why the same business is fragile below it — Break-Even Analysis.
Where it matters in growth work
- Discounting. Only variable costs are avoided by not selling, so a discounted sale still contributing anything beats no sale — as long as it isn’t cannibalising a full-price one — Discount Impact on Margin
- Acquisition ceilings. What you can pay for a customer is set by contribution, which is revenue minus variables — Customer Acquisition Cost
- Free shipping. Fulfilment is variable, so a threshold has to clear it — Shipping Thresholds
- Category decisions. A category with high variable costs and low margin can be revenue-positive and contribution-negative — Merchandising