January 11, 2023

Variable Expenses

I recall a decade ago when I was trying to sell a catalog optimization project to an existing client. This client worked with a vendor, and the client showed me the annual invoice from the vendor.

  • $120,000.
My cost was $45,000. I asked the client why they pay this vendor $10,000 a month when they could pay me $45,000 once and be done and have essentially the same outcome. Their answer:
  • "They just make everything easy so we don't have to think about it."

The vendor told me a comparable story.
  • "We love the client. And it is easy, recurring revenue for us."

You have a good pairing when each side uses the word "easy" ... even if for very different reasons.

The $10,000 a month was based on the size of the customer file ... in other words, it was a "variable expense". The expense grew when the customer file grew, the expense shrunk when the business contracted.

When it becomes difficult to acquire new customers, the ad budget goes first ... and that's a tough one, because you cut out the ad dollars and you cut back on sales/customers and that's the problem you are trying to avoid. So you go after fixed costs next ... stuff like your job, unproductive stores if you are Macy's, that kind of thing. You can only go so far with fixed costs.

That's when variable costs come into play.

If I had to predict, 2023 is going to be a year where variable costs are on the table. Are you tired of paying Shopify a percentage of everything you sell? That's a variable cost. How about your email service provider? That's a variable cost. 

All of these expenses are going to be explored in detail in 2023.


No comments:

Post a Comment

Note: Only a member of this blog may post a comment.

Category Development and Gross Margin Dollars

Here's one that comes up all the time. A brand has a category with an average price point of $30 and an average cost of goods sold of $1...