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What Is a Semi-Variable Cost?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 12 September 2016
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    2003-2016
    Conjecture Corporation
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Also known as a semi-fixed cost or a mixed cost, a semi-variable cost is a type of charge that progresses from a variable cost to a fixed cost or vice versa over time. One of the more common models for this type of pricing matrix is for the client to be charged a fixed rate at the onset of a contract and continue to enjoy that fixed rate for a specified period of time. When certain events spelled out in the contract come to pass, the cost switches to a variable approach that is calculated using the provisions found within that contract. A similar application of a semi-variable cost involves providing a client with a set of basic services that is covered by a monthly fixed payment, while offering other ancillary services that the client may choose to use for additional costs above and beyond that basic fixed rate.

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One of the easiest ways to understand how a semi-variable cost functions in a contract situation is to consider a company that has agreed to two-year contract with a conference call firm. The terms of the contract may call for extending a specified rate for basic conference call services for the first six months of that contract, in anticipation of the client gradually increasing the amount of business volume generated. At the end of the six months, the provider may determine that business volume has grown to the point of implementing tier pricing, which basically allows the client to enjoy a lower rate during billing periods in which the total usage exceeds a certain amount. If the customer’s usage fluctuates from one billing period to the next, the actual cost per minute per line of conference call usage will also fluctuate, rather than being billed out at the same rate each month.

There are both benefits and potential drawbacks to the use of a semi-variable cost. When the arrangement allows customers to pay less for goods and services rendered over time, it can have the benefit of keeping operational costs lower for those customers. Providers may also benefit from this arrangement, in that customers who know they can obtain a lower variable cost by purchasing more may do so, allowing the provider to sell more units of product. One down side to this arrangement is that some customers will not need additional products and will not be interested in tracking the changes in costs from one period to the next, which in turn may prompt them to look for providers who offer flat rate pricing instead. At the same time, if those clients are not motivated to buy more units, the benefits of the semi-variable cost model may be lessened for the providers, possibly to the point of doing the business more harm than good.

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