What is Variable Costs vs Fixed Costs?

Fixed costs are expenses that do not change with the level of production or sales (e.g., rent, salaries). Variable costs are expenses that fluctuate directly with production or sales volume (e.g., raw materials, shipping).

For Startups: Understanding this distinction is key to calculating the contribution margin and breakeven point. A high ratio of variable to fixed costs can mean lower risk but also lower operating leverage.

For SaaS: For a pure SaaS business, variable costs are typically low (e.g., server costs, payment gateway fees), leading to very high gross margins. For a hardware startup, variable costs (cost of goods sold) are much higher.

Example: For a D2C brand, the cost of the product is a variable cost, while the rent for its office is a fixed cost.