July 04, 2017

Fixed and Variable Costs

Here's a reason for moving to Phoenix ... housing costs are about half (per square foot) of what they were in Western Washington. Imagine what happens when you move from a mid-sized house to a small home?

The change in fixed cost structure means that I can afford so much more today than I could just sixty days ago. If health care costs jolt up, I'm protected. In the Pacific Northwest, the fixed costs associated with housing require compromises elsewhere.

"Digital" strategy is transforming the fixed/variable cost structure of our businesses. Old-school catalog and traditional retail are like housing in the Pacific Northwest - high fixed costs. Retail stores are outdated not because customers don't like 'em (because 85% of sales still happen in physical retail) but because fixed costs prohibit retailers from making changes. You try to change when you have to make debt payments or rent (or both). Cataloging is even worse - catalogs should be a variable expense but have become fixed because catalogers refuse to move on from ... catalogs!

Meanwhile, e-commerce looks more like the Phoenix housing market ... no fixed costs associated with rent/debt and no fixed-costs-pretending-to-be-variable-costs in catalog marketing. This gives the e-commerce brand more flexibility and more opportunity to do different things (free shipping, subscription models, spend a ton with Google one month and then nothing the next month).

"Digital" represents a shift from fixed-cost to variable-cost business models - and those that "scale" have minimal variable costs as well. It doesn't cost Facebook anything to add another hundred thousand users.

Future retail models will need to address the fixed-cost structure of businesses. 

Future digital models will need to address the variable-cost structure of businesses.

The closer you are aligned with fixed costs and fixed-costs-pretending-to-be-variable-costs, the closer you are to trouble.

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