variable and fixed costs
There are two kinds of costs. The first is variable cost, also referred to as the “cost of goods sold,” or COGS: the cost associated with selling each marginal unit of product. In brick-and-mortar businesses, that includes costs like labor, packaging, raw materials, and more. For software businesses in the 1990s, COGS were non-zero because software was put onto CDs and sold in retail stores. Things have changed a lot since then. “Shipping” some electrons over the internet is virtually free, and the internet makes it much cheaper to collect payments online. For example, for each dollar we earn at Gumroad, we incur about 40 cents of variable costs. This 40 percent consists of payment processing fees, web hosting costs, other infrastructure costs, and fraud prevention (a necessary evil of helping people transact online). That leaves us 60 cents per dollar. But that 60 cents isn’t pure profit—we still need to pay the second kind of costs, fixed costs, which don’t scale linearly with our revenue and each incremental product sold. This includes everything from our domain name to certain online services, but these aren’t the main expenditures for us or for most businesses, minimalist or not. The number one fixed cost is people. In the next chapter, we’ll talk more about what it means to bring human beings into your company, but for now, let’s just say that employees, their equipment, the office space they need, the internet connection, the insurance for the space, the snacks in the fridge, the electricity, and so on, cost a lot of money, and rightfully so. Starting with you, so . . .
Link:: The Minimalist Entrepreneur