Variable Costs Versus Fixed Costs: Lessin’s Lesson

I was introduced to this concept of Variable costs versus Fixed costs in this wonderfully insightful book called Lessin’s Lessons, written by the father of iconoclastic VC Sam Lessin. His father Bob was a brilliant investment banker and Angel investor during the first dotcom boom in the 90s. Because he had several life threatening illnesses through his early years he wanted to write down lessons for his kids. It’s really great. 

One of the concepts he discusses is the idea of variable costs versus fixed costs in life. It sounds very personal finance which it is but it has good relevance to how one lives their lives. So stick with me here for a bit. 

Fixed costs are things you have to pay for every month. Your mortgage payment, tuition or car payments, utilities, taxes, your phone bill. It’s the bare minimum you have to cover every month no matter what. 

Variable costs are those that you pay sometimes and the amount also varies. This could be a book, food, a trip somewhere or even a phone or computer. 

He talks about how his son Sam treats most of his costs as variable. Instead of leasing or buying a place, he pays by the night at a friend's apartment so the costs become variable. He has a policy of having bare bones costs structure and disdain for flashy expensive things showing klout. 

It’s an interesting philosophy. Think about our own lives, we start with variable costs but as we get older and have a family as well as lifestyle creep, variable costs become very high fixed costs. 

I can tell you all about how expensive supporting a family is. Especially as you want them to have a good lifestyle and also due to some guilt from not being around much. But for most of us we also get trapped in the hedonistic treadmill that I wrote about before. 

The trip that used to be variable now becomes normal and a need not a want.  Luxury goods become expected. The $500 dollar bottle of wine eventually becomes a thousand dollar bottle of wine. Business class is always better than economy. 5 or 6 star hotels like Mandarin Oriental are hard to beat. 

It’s hard to downshift or downgrade your lifestyle. But the irony is that we eventually do as we wise up and start to understand what we truly like and don’t like. When we truly understand what is a need versus what is a must. This definitely helps you get maximum ROI on your spending and not waste money on non essential or things that give you no joy. Damn I wish I learned this earlier. 

There is deep relevance to the startup world here too. Think about the bloated growth stage startups who gorged themselves on cheap VC capital and spent it on buying tech that was not useful and hiring people they didn’t need. Variable costs became fixed costs and as the VC money train disappeared and the expected revenue did not show up, they are in for some major pain. Which usually means ugly layoffs and cost cutting to get to break even or profitability, scramble for a working business model if there is no product market fit or worse they just linger like zombies until the business dies. 

So the lesson from Lessin, keep your cost structure low by thinking variable costs not fixed costs. And this will give you the freedom and flexibility to survive and take advantage of the opportunities that inevitably show up on the down cycle.