In plain words
A variable cost is one you pay because a particular order happened. No order, no cost. The product in the box, the warehouse's fee to pick it, the box, the label and the card fee are all variable.
Fixed costs are the rest: rent, salaries, software, the photo shoot. They are owed whether you ship one order this month or ten thousand. An offer decision should look only at variable costs, because those are the only ones the offer can move.
Formula
- Variable cost of an order = Σ of every cost that order caused
- Contribution margin = revenue − variable cost
Worked example
The $40.00 bag's order has $24.64 of variable cost. Every cent of it is there because the order was placed.
Three bags in one order cost $53.94, well under three times as much. Variable does not mean proportional: the product cost tripled to $36.00, while the label stayed at $7.50.
The example order
A $40.00 bag of coffee, shipped free, every cost counted
2 declared kinds cost nothing on this option
| Step | Grain | Amount |
|---|---|---|
| Revenue | – | $40.00 |
| Cost of goods | per unit | −$12.00 |
| Pick and pack | per order | −$1.18 |
| Packaging | per parcel | −$0.50 |
| Shipping label | per parcel | −$7.50 |
| Card fee per order | per order | −$0.30 |
| Refunds | percent | −$2.00 |
| Card processing | percent | −$1.16 |
| Contribution margin | – | $15.36 |
| 2 kinds costing nothing | – | $0.00 |
Computed by the margin engine in Offer Suite's own code, in whole cents, from a $40.00 bag of coffee with a $12.00 unit cost.
Variable does not mean it scales with units
Some variable costs are charged per unit, some per order, some per parcel and some as a share of revenue. All of them are variable, because none exists without the order. Treating them all as per-unit is the usual way a bundle gets mispriced.
Using it
List every cost an order triggers and write next to each how it is charged: per unit, per order, per parcel or as a percentage. Leave advertising out of the order's variable cost and treat it as the cost of winning the customer. It is set by the campaign, not by the offer, and mixing the two hides both.