Resources

Scaling with a Variable Cost Structure

By Danijel Filipovic, Technical Account Executive

It’s the question that every new business must answer at some point: How can we grow and enhance our scalability as we do so? By embracing and implementing a variable cost structure for certain components of your operation, your tech-enabled business can be positioned to scale efficiently and remain nimble enough to be flexible to trends and developments.

Before we go further, let’s outline some basic definitions for greater clarity. All businesses, whether they’re hammering out widgets or providing a new SaaS product, have to account for costs — and all costs can be broadly categorized as fixed or variable. Variable costs are expenses that increase or decrease depending on a company’s production or sales volume. After all, if you’re making more widgets, you’re going to need more raw materials to produce them. Shipping and packaging are other examples of variable costs.

This is in contrast to a fixed cost, which remains independent of how much you make or sell. These are much more long-term in nature. If you rent your office space, it’s going to cost the same whether you sell 1,000 products or none. Personnel expenses — salaries, insurance, benefits, and the like — often fall into the fixed category as well.

Scaling Up and Turning Fixed Into Variable

Improving the scalability of your overall cost structure requires keeping your fixed and variable costs as low as possible, while still meeting thresholds necessary to make more products or offer more services. In addition, companies with a high proportion of variable costs relative to fixed costs are considered to be more stable, as their profits are more dependent on the success of their sales.

Both of these bode well for tech-based businesses. Developing digital products typically doesn’t require the physical materials or production supplies needed for physical products, keeping those variable costs low. In fact, fixed costs — tied heavily into the employees needed to create software, apps, and so on — are often the lion’s share of costs for such companies. 

But those advantages can disappear as the company begins to scale. To build a good product you need a wide array of people and specific roles — designers, product organizers, front-end and back-end talent, server specialists, and more. When you grow, and need more product, you’re going to need more people. If you continue to hire within, and add more fixed costs to the equation, your ability to scale and be resilient is impacted.

This is vital for tech-based businesses. By imparting a more variable cost structure to perceived fixed costs, companies maintain the ability to deliver more without adding cumbersome weight.  The right outsourced product strategy and development team provides all the insight, knowledge, and experience you need to scale your business, without the long-term fixed cost associated with building out your internal team further.

External Support from Vault: From fractional CTO and staff augmentation services to a full design and development team to shepherd projects, Vault provides vetted, experienced help to address talent deficits. Connect with us to learn more.

The Value of a Variable Cost Structure

By turning to outsourced development teams, tech-based and tech-enabled businesses gain needed flexibility and agility. The benefits of staff augmentation services are many  — such as access to qualified specialists, greater speed, and reliability — but chief among them is the variable cost aspect. This leads into a more responsive, and nimble, digital product business in several ways.

By keeping your variable and fixed costs in an appropriate ratio, given the specifics and pricing strategy of your business, you can maintain a better overall posture with an eye on scalability and growth. You also avoid falling prey to a fixed cost treadmill, continuing to sink more resources into long-term costs to meet existing demand.

A variable cost structure encourages flexibility in developing new products as well. Tapping into an external team can allow you to quickly iterate on a new initiative and get it into the market. You can shop it, get feedback about what works, and then wind everyone back down. 

With a variable cost structure approach to development, you don’t have to keep feeding the R&D beast. You can pause it for a month or quarter and see what your customers think. Then ramp it back up to finish the current version, or begin to build the next. 

Tech-Enabled? It’s Even More Important

Many businesses don’t produce new technology breakthroughs or cutting-edge applications, but rely on tech to deliver their services. Ensuring a variable cost structure is even more vital for their scalability.

As a tech-enabled company, your ‘product’ is the service you’re offering to your customers — not the technology itself. Maybe it includes a client portal to access mental health counseling or an app to better empower agents working in the field. The point is you’re trying to make your customers happy, garner loyalty, and improve their overall experience; you’re not selling them the technology itself or creating new IP. Technology is important to what you do, but it’s not what customers are coming to you for.

In these cases, outsourcing technology development and imparting more variable cost is particularly appealing. You’re able to leverage a fully realized team right out of the box, complete with all the needed specialists and roles. Your business can focus on what you do best, and won’t have to rely on internal team members taking on additional responsibilities or adding new team members to do so.

You don’t need a full-time development team hammering away every day. You can outsource to build what you need to make your service better, and then move on. You maintain better control over scarce resources and can get back to listening to your customers so you can figure out the next iteration of it. 

Plot Out Your Next Steps: You’ve successfully launched your new product, congrats! Now what? Software enhancements are often necessary to keep moving forward. Learn more here.

Realize Variable Cost Structure Benefits with Vault

With an outsourced, innovation-minded team such as Vault, you gain access to a ready-made team capable of coming in and tackling tech-specific projects while you continue to listen to your customers, mine valuable feedback, and discover what they want next in terms of future solutions.

We supply the specialists armed with technical expertise to address the concepts and roles where you may be lacking resources, from developers, designers, and project managers to even fractional CTOs. Vault helps improve your scalability by allowing you to implement a variable cost structure through staff augmentation services that empower new initiatives, address neglected projects, and add human capital while keeping fixed costs low. 

For a decade, we’ve been the proven partner that has helped businesses expand their tech with confidence. With flexible engagement models and a host of services — covering strategic planning, product design, software development, and operational support — we’re a partner in success at every step. 

Learn more about how we use technology to grow your business. Connect with our team today to schedule a no-obligation discovery session.