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What It Is & How to Calculate It

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What It Is & How to Calculate It


“Business is personal — it’s the most personal thing in the world.”

These are famous words by Michael Scott from the TV show, The Office. And although this quote conflicts with the universal belief that business isn’t personal, Michael’s point of view is perfect when learning about a business’s fixed costs — or those costs that don’t change as a company grows or shrinks.

To identify and calculate your business’s fixed costs, let’s start by looking at the ones you’re already paying in your personal life. Then, we’ll explain how a business manages its own fixed costs and review some common fixed cost examples.

Fixed costs are distinguished from variable costs, which do change as the company sells more or less of its product.

To better understand how fixed and variable costs differ, let’s use personal finances as an example. As a single adult, your expenses would normally include a monthly rent or mortgage, utility bill, car payment, healthcare, commuting costs, and groceries. If you have children, this can increase variable costs like groceries, gas expenses, and healthcare.

While your variable costs increase after starting a family, your mortgage payment, utility bill, commuting costs, and car payment don’t change for as long as you’re in the same home and car. These expenses are your fixed costs because you pay the same amount no matter what changes you make to your personal routine.

In keeping with this concept, let’s say a startup ecommerce business pays for warehouse space to manage its inventory, and 10 customer service employees to manage order inquiries. It suddenly signs a customer for a recurring order that requires another five paid customer service reps. While the startup’s payroll expenses go up, the fixed cost of a warehouse stays the same.

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To get the full picture of what costs are associated with running your business, it’s important to understand the total fixed cost and average fixed cost.

Total Fixed Cost

The total fixed cost is the sum of all fixed costs that are necessary for running your business during a given period of time (such as monthly or annually).

How to calculate total fixed cost

Average Fixed Cost

Keep in mind you have to keep track of your business’s fixed costs differently than you would your own. This is where the average fixed cost comes into play.

Average fixed costs are the total fixed costs paid by a company, divided by the number of units of product the company is currently making. This tells you your fixed cost per unit, giving you a sense of how much the business is guaranteed to pay each time it produces a unit of your product — before factoring in the variable costs to actually produce it.

Average Fixed Cost formulaLet’s revisit the ecommerce startup example from earlier. Assume this business pays $5,000 per month for the warehouse space needed to manage its inventory and leases two forklifts for $800 a month each. And last month, they developed 50 units of product.

The warehouse and forklift costs remain unchanged regardless of how many products they sell, giving them a total fixed cost (TFC) of $5,000 + ($800 x 2), or $6,600. By dividing its TFC by 50 — the number of units the business produced last month — the company can see its average fixed cost per unit of product. This would be $6,600 ÷ 50, or $132 per unit.

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How to Calculate Fixed Cost

To calculate fixed cost, follow these steps:

  1. Identify your building rent, website cost, and similar monthly bills.
  2. Consider future repeat expenses you’ll incur from equipment depreciation.
  3. Isolate all of these fixed costs to the business.
  4. Add up each of these costs for a total fixed cost (TFC).
  5. Identify the number of product units created in one month.
  6. Divide your TFC by the number of units created per month for an average fixed cost (AFC).

Fixed Cost Examples

So far, we’ve identified a handful of fixed cost examples since considering the costs we already pay as individuals. A home mortgage is to a lease on warehouse space, as a car payment is to a lease on a forklift.

But there are a number of fixed costs your business might incur that you rarely pay in your personal life. In fact, some variable costs to individuals are fixed costs to businesses. Here’s a master list of fixed costs for any developing company to keep in mind:

Examples of fixed costs needed to run a business

  • Lease on office space: If you rent office space to serve as headquarters or employee workspace, these costs tend to be relatively stable.
  • Utility bills: The cost of utility bills in company offices may fluctuate as seasons change, but it is generally not affected by business operations.
  • Website hosting costs: When you register your website domain, you pay a small monthly cost that remains static despite the business you perform on that website.
  • Ecommerce hosting platforms: Ecommerce platforms integrate with your website so you can conduct transactions with customers. They typically charge a low fixed cost per month.
  • Lease on warehouse space: Warehouses are paid for the same way you’d pay rent on your office space. The cost is relatively stable but you may run into storage and capacity limits that can impact cost.
  • Manufacturing equipment: The equipment you need to produce your product is yours once you buy it, but it will depreciate over its useful lifetime. Depreciation can become a fixed cost if you know when you’ll have to replace your equipment each year.
  • Lease on trucks for shipment: If your company sells physical products, transportation may be a regular cost. Truck leases work the same way as a car payment, and will not charge differently depending on how many shipments you make.
  • Small business loans: If you’re financing a new business with a bank loan, your loan payments won’t change with your business’s performance. They are fixed for as long as you have a balance to pay on that loan.
  • Property tax: Your office space’s building manager might charge you property tax, a fixed cost for as long as your business is on the property.
  • Health insurance: Health insurance costs might be a variable cost to an individual if they add or remove dependents from their policy, but to a business, the recurring costs to an insurer are fixed.
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Calculating your fixed costs isn’t always the most fun part of growing your business. But knowing what they are, and when you’ll pay each one, gives you the peace of mind you need to serve and delight your customers.

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MARKETING

How marketers can use behavioral data to improve customer experiences

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How marketers can use behavioral data to improve customer experiences


“Marketers are expected to deliver campaigns that cultivate rich customer experience and drive brand awareness, all within a quick turnaround time,” said Megan Sangha, Senior Product Marketing Manager at Wrike, in her presentation at our MarTech conference. “Things could be different if science and data were combined within a single source of truth platform to help drive better outcomes.”

Digital disruptions are occurring more than ever before thanks to the 2020 pandemic and technological innovation. These changes have altered the way consumers behave in the purchasing process, which has in turn forced brands to accelerate their digital transformation efforts.

“With consumer behavior drastically shifting to digital, this world is crowded with competitors quickly working to capture consumer attention,” Sangha said. “Marketing executives are struggling to stand out from competitors while trying to keep their current customers. “

“Now more than ever, marketers need to be innovative and creative with their tools and data to quickly deliver eye-catching and innovative campaigns to stand out among the rest,” she added.

Despite the prevalence of tight deadlines and dwindling resources, marketers are expected to provide customers with engaging experiences. To combat this, Sangha recommends turning to psychology, gleaning behavioral insights from buyer journeys.

Use behavioral science to understand decisions

“Behavioral science is a great strategy for optimizing campaign performance through the help of psychology,” Sangha said. She pointed to a helpful diagram (shown below) that illustrates the customer decision-making process from a psychological perspective.

Source: Megan Sangha

“The large circle is exposure or brand awareness,” she said. “Brand awareness can be found in obvious areas like the ad you see when you’re scrolling through social media or a pop up that you click on . . . Exposure is always on, always changing, and always influencing decision-making.”

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Sangha then went on to describe the top and bottom points of the circle, which represent the “triggers” and “purchase” phases, respectively: “Triggers are where a consumer starts their journey. It is influenced by either exposure or a need.”

Consumers then move down into the “messy middle” of the circle, which is the phase wherein they being exploring and evaluating brand offerings.

These explorary and evaluation stages are where brands have the opportunity to build brand loyalty and customer satisfaction. Sangha said these are strengthened through “great customer experience, smooth transaction, and in today’s world, fast delivery.”

Understand cognitive biases that influence purchase behavior and decision-making

“Consumers are moving back and forth between exploration and evaluation, depending on the size of the purchase,” said Sangha. “For marketers, it’s not so fun. And it’s definitely not efficient. How can we get our customers from triggers to purchase? Through psychology.”

She added, “As people explore and evaluate within the messy middle, cognitive biases shape their shopping behavior and influence why they choose one product over the other.”

Source: Megan Sangha

Sangha described six primary cognitive biases (shown above) that affect consumer behavior. Whether it’s consumers’ propensity to buy things perceived as scarce or those recommended by authoritative sources, it’s vital that marketers know what’s affecting their decision-making processes.

“Understanding behavioral bias and the customer journey are really important,” Sangha said. “Marketing teams that use these principles and psychology see higher customer satisfaction, lower customer turnover, improve the sales process and finds better advocacy from current customers.”

Use behavioral data to optimize channel performance

“To drive better [customer] decisions, marketers need to ensure the information being provided is consumable to the masses,” said Sangha. “We don’t want stakeholders to be overwhelmed with spreadsheets and intricate dashboards that become complacent with their decision-making.”

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Presenting this behavior data in a coherent fashion to other departments will help coordinate your marketing efforts companywide, leaving less room for discrepancies in customer experiences across channels. But with so many signals being tracked, it can get overwhelming quickly.

“There is so much thrown at digital marketers,” she said. “They’re using different channels, platforms, solutions, and tools to track assets, campaign, user, customer performance data, etc. And every piece of data gives them insights on market trends and consumer behavior.”

“The only problem is that right now most digital marketers are manually piecing everything together, which means they’re spending way too much time tracking and pulling together data instead of viewing, strategizing and executing,” she added.

Sangha recommends marketers adopt a project management platform to help ensure customer data is clean and applied to the relevant channels, which helps optimize campaign performance: “A recent McKinsey study showed that digital marketers spend 80% of their time manually sifting through data, pulling together spreadsheets or dashboards to track performance data, and only 20% of their time is spent on strategy.”

She added, “Think what you could do with your campaign strategy and overall outcome if you were able to get more time to strategize versus sifting through data.”

Marketing work management: A snapshot

What it is: Marketing work management platforms help marketing leaders and their teams structure their day-to-day work to meet their goals on deadline and within budget constraints, all while managing resources and facilitating communication and collaboration. Functions may include task assignments, time tracking, budgeting, team communication and file sharing, among others.

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Why it’s important today. Work environments have changed drastically due to the COVID-19 pandemic. This has heightened the need for work management tools that help marketers navigate these new workflows.

Marketers have been at work developing processes that allow them to work with those outside their own offices since marketing projects—campaigns, websites, white papers, or webinars—frequently involve working with outside sources.

Also, with marketers required to design interfaces, write content, and create engaging visual assets today, more marketers are adopting agile workflow practices, which often have features to support agile practices.

What the tools do. All of these changes have heightened the need for marketing work management software, which optimizes and documents the projects undertaken by digital marketers. They often integrate with other systems like digital asset management platforms and creative suites. But most importantly, these systems improve process clarity, transparency, and accountability, helping marketers keep work on track.

Read next: What is marketing work management and how do these platforms support agile marketing


About The Author

Corey Patterson is an Editor for MarTech and Search Engine Land. With a background in SEO, content marketing, and journalism, he covers SEO and PPC to help marketers improve their campaigns.



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MARKETING

3 Principles of “Post Digital” Marketing with Ryan Deiss [VIDEO]

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3 Principles of "Post Digital" Marketing with Ryan Deiss [VIDEO]


When it comes to digital marketing what do you need to OWN to make sure your business thrives in this post-digital world?

WHAT IS DIGITALMARKETER:

DigitalMarketer is the premier online community for digital marketing professionals. It’s a place where you can learn how to market like a pro, connect with industry experts, and get the strategies and tools you need to grow and scale your business to new heights.

https://www.digitalmarketer.com/



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MARKETING

The Quick & Easy Guide To Freezing Rows in Excel

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The Quick & Easy Guide To Freezing Rows in Excel


Without freezing rows or columns in your Excel spreadsheet, everything moves when you scroll through the page, as shown in the gif below.

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