All Variable Cost (Production)

Zero Fixed Cost is good, but can All Variable Cost be bad?

In 1998 if you started up a new idea, you would start by raising the requisite tub of money to pay off Sun, Oracle, BEA, and Cisco so you could get started. Assuming you could get that money, your costs going forward were mostly people costs related to building out and servicing your idea.

The interesting part is that when you were raising the money in that early round, you might be paying a few people but your costs were at some level discretionary (even if they didn’t seem that way). So you might want the money really bad, but you could dial down the cost if necessary to control your leverage position with your potential investors if you needed to.

Today with open source software stacks and services such as EC2 you can get started much less expensively and may not even have to raise money from anyone other than friends and family to get your service up and running.

But… can you afford for it to be a success? In an all variable cost world what happens when your brand new YouDiggFaceBookMySpaceTubeThingy takes off like viral cheese whiz?

You’ll have to raise money of course to keep things going while you get the revenue engine running but now you are raising money while your variable costs are rising in proportion to your user base, your credit cards are maxed out, and your potential investors smell blood.

Or… back to the original topic… If you are a government agency buying managed services built for cheap on EC2 that are suddenly a wild success, are you willing to pay for it?

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