Semi-variable costs transition from a variable to a fixed cost or vice versa over time. Customers are charged a fixed rate for a specified period, then the cost switches to a variable approach. This model can benefit both customers and suppliers, but some customers may prefer flat-rate pricing.
Also known as a semi-fixed or blended cost, a semi-variable cost is a type of charge that transitions from a variable cost to a fixed cost or vice versa over time. One of the most common models for this type of pricing matrix is for the customer to be charged a fixed rate at the start of the contract and continue to enjoy that fixed rate for a specified period of time. When certain events specified in the contract occur, the cost switches to a variable approach which is calculated using the provisions contained in the contract. A similar application of semi-variable cost involves providing a customer with a set of basic services covered by a fixed monthly payment, while offering other ancillary services that the customer may choose to use for additional costs above and beyond this basic fixed rate.
One of the easiest ways to understand how semi-variable cost works in a contract situation is to consider a company that has agreed to a two-year contract with a teleconferencing company. The terms of the agreement may require a specific fee for basic teleconferencing services to be extended for the first six months of the agreement, in anticipation of the customer gradually increasing the amount of business generated. At the end of the six months, the vendor may determine that business has grown to the point of implementing tiered pricing, which essentially allows the customer to enjoy a lower rate during billing periods when total usage exceeds a certain amount. If the customer’s usage varies from one billing period to another, the actual cost per minute per line of teleconferencing usage will also fluctuate, rather than being billed at the same rate each month.
There are both advantages and potential disadvantages to using semi-variable cost. When the arrangement allows customers to pay less for goods and services rendered over time, it may have the benefit of keeping operating costs low for those customers. Suppliers can also benefit from this arrangement, as customers who know they can get lower variable cost by buying more can do so, allowing the supplier to sell more units of product. A downside to this arrangement is that some customers won’t need additional products and won’t be interested in tracking how costs change from period to period, which in turn may prompt them to seek out suppliers who offer flat-rate pricing instead. At the same time, if those customers aren’t motivated to buy more units, the benefits of the semi-variable cost model could be diminished for suppliers, perhaps to the point of doing more harm than good to the business.
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