A semi-variable cost is a charge that progresses from a variable to a fixed cost or vice versa over time. It can benefit customers by allowing them to pay less over time, but some may prefer fixed pricing. Suppliers can benefit from selling more units, but if customers are not motivated to buy more, it may hurt the business.
Also known as a semi-fixed or 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 most common models for this type of pricing matrix is for the customer to receive a fixed rate at the beginning of a contract and continue to enjoy that fixed rate for a specified period of time. When certain events detailed in the contract happen, the cost changes to a variable approach that is calculated using the provisions found in that contract. A similar application of a semi-variable cost involves providing the customer with a set of basic services covered by a fixed monthly payment, while offering other ancillary services that the customer can choose to use for additional costs above and beyond this basic fixed fee.
One of the easiest ways to understand how a semi-variable cost works in a contract situation is to consider a company that has agreed a two-year contract with a teleconferencing company. Contract terms may require the extension of a specified fee for basic conference calling services within the first six months of that contract in anticipation of the customer gradually increasing the amount of business generated. At the end of the six months, the provider may determine that the volume of business has increased to the point where it implements tier 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 period to the next, the actual cost per minute per line of conference calling usage will also vary, rather than being billed at the same rate each month.
There are benefits and potential drawbacks to using a semi-variable cost. When the arrangement allows customers to pay less for goods and services provided over time, it can have the benefit of keeping operating costs lower for those customers. Suppliers can also benefit from this arrangement, as customers who know they can get a lower variable cost by buying more can do so, allowing the supplier to sell more units of product. A disadvantage of this arrangement is that some customers will not need additional products and will not be interested in tracking changes in costs from one period to the next, which in turn may lead them to look to suppliers who will instead offer fixed prices. At the same time, if these customers are not motivated to buy more units, the benefits of the semi-variable cost model can be reduced for suppliers, possibly to the point where it hurts the business more than it benefits the business.
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