The goal of any business is to maximize shareholder value through long term, sustainable profitability. This can be achieved by a combination of increasing revenues and reducing costs.

Traditionally, costs have been divided into two main categories: Variable or Cost of Goods Sold (COGS), which fluctuate with volume and Fixed or Indirect Costs, comprising anything not directly related to the product or service and commonly considered independent of sales or production.

Typically considered fixed costs are management and admin staff, rent, insurance, utilities, telecom, payroll processing, benefits and taxes among others. Though in some cases, categories like utilities or payroll processing may vary with output, they are usually considered fixed as managers view them as non-actionable.

The traditional breakeven analysis chart is a useful tool to establish the sales required to cover fixed costs and become profitable. See an example below:

Assume Company A has $5,000 in fixed costs, variable costs of $3 per unit, and a selling price of $8. Under this cost structure, it needs to sell 1,000 units or $8,000 to breakeven and cover $8,000 of total costs ($5,000 Fixed and $3,000 variable). Sales above that point generate a profit, sales below it result in a loss.

Because of this traditional distinction, managers often accept fixed costs as such and concentrate their attention on increasing revenue and reducing costs of goods sold.

Although these are important strategies, implementing them can be challenging, as they may compromise product quality or service levels, particularly when cost reductions involve modifying, downgrading, or diminishing the value of the product or service offered.

This approach to fixed costs creates a surrender mindset, leading managers to give up on influencing costs they perceive as immovable or beyond their control.

But what if those costs weren't truly fixed? What if, by challenging conventional assumptions and taking a closer look, we could identify opportunities to reduce them, lower our breakeven point, and ultimately improve profitability?

In this example, reducing fixed costs by 20%, from $5,000 to $4,000, would lower the break-even point from 1,000 units ($8,000 in revenue) to just 800 units ($6,400 in revenue). The business could then achieve profitability with fewer sales, potentially reducing the sales and marketing effort required, without compromising the quality of its products or services.

The purpose of this article is to explain why some fixed costs are not actually fixed and present some ideas and a framework to help lower them in a practical way. It also intends to encourage management to shift its mindset and culture toward this important topic.

There are several reasons why costs classified as fixed may not be truly fixed. Over the years, we have identified the following as the most common ones:

In a competitive market, businesses may have multiple vendors, technologies, and plans available to meet the same needs.

This was the case with a construction materials distributor being charged a flat discount fee to process their credit card payments from clients. A different vendor was able to offer an interchange plus model, reducing their effective rate from 4.1% to 2.0%, cutting this monthly cost in half.

An electronics manufacturer whose employees traveled abroad was paying high cellphone roaming charges. Switching to international travel passes while employees were away reduced the monthly bill by 24%. The business kept its carrier, just changed the plan.

A chain of restaurants consumed a high amount of natural gas for their kitchens. They were under the impression that the cost of this utility was the same across the industry. Through a new vendor, consolidating all locations and signing a 3-year agreement, the business was able to reduce this expense by 55%.

In all three cases, management treated these costs as fixed and focused its attention elsewhere. A closer review revealed opportunities to reduce them.

Often, businesses select vendors, sign and renew agreements to cover basic services and don’t realize their needs may have changed. However, contracts and services may continue unchanged unless someone reviews them.

A local bank asked us to review several expense categories. In its telecom setup, we found three data circuits that were being billed but never used. Eliminating them and selecting a new vendor reduced internet charges by 40%, without disrupting operations.

A private school contracted garbage removal when it first opened. As enrollment grew, the school regularly paid for extra pickups and overages. Adding one pickup day and renegotiating the overage charges reduced the monthly bill by 30%.

A food distributor had joined a professional employer organization (PEO) after an expensive accident sharply increased its workers compensation rate. After several years of safe operations, the company qualified for a competitive workers compensation policy and left the PEO. This reduced payroll processing, workers compensation, and related fees by 45%.

These examples show how reviewing current needs can uncover cost savings opportunities that routine renewals leave untouched.

On occasions businesses may be stuck with old agreements with outdated technologies and terms.

Telecom is one of the best examples of how emerging technologies can drive down costs. Long-distance calls used to be charged at high per-minute rates, while internet access cost significantly more for much lower speeds. Today, technological advances have made communication far more efficient and cost-effective.

Recently we reviewed a business with eight locations that was using multiprotocol label switching (MPLS) under an agreement signed five years earlier. Moving to a software-defined wide area network (SD-WAN) reduced the monthly expense by 43% and improved service reliability.

New vendors and plans are constantly introduced to the market. When managers lack time to compare them, they may renew existing arrangements without checking whether a better fit is available. For example, in healthcare some carriers now offer level-funded medical plans with lower rates and the possibility of a year-end refund when claims remain moderate.

Today, AI offers many ways to simplify or automate tasks, potentially reducing the time and cost involved. Common examples include virtual assistants and customer service agents.

There are several tax incentives available that can reduce operating expenses in different categories, including utilities, R&D, payroll, and property taxes.

Recently we were able to reduce property taxes by 18% for a group of hotels that wasn’t aware these costs could be lowered and considered not worth reviewing.

Another manufacturer of plant equipment was able to recover 10% of their R&D costs through this incentive.

One common source of overspending is errors in plans, invoices or policies. These inaccuracies can go undetected for years when invoices and policies are not regularly reviewed and challenged.

A bakery chain had classified its employees under incorrect workers compensation codes. By correcting the classifications and consolidating the policies across all locations, we helped reduce their insurance costs by 45%.

In another case, a condominium association was being overbilled by the city due to a defective water meter. Replacing the meter reduced its monthly water bill by 37%.

Over the years we have developed a simple methodology to help identify and manage indirect costs. We call it the NVP Framework.

N for Needs,V for Vendors and P for Processes.

As shown in previous examples, business needs can evolve so they require periodical reassessment. Keep in mind, vendors are not always aware of these changes and most likely will not recommend adjustments unless requested by the client.

A similar phenomenon happens with redundancy or unneeded services like the case of the data circuits mentioned before or unused cellphones or landlines. Don’t expect vendors to point this out.

Competition and innovation can create new ways to service business needs at a lower cost.

Manufacturing facilities and hotels often treat water bills as fixed costs. We’ve helped businesses in these sectors reduce water costs by 15–35% using specialized technology for water pipelines.

Recently, we began recommending a healthcare carrier that uses AI to manage costs and offer lower premiums. New technology also makes it possible to access supplemental coverage that can reimburse deductibles and other out-of-pocket expenses.

Businesses should also demand more from current advisors like insurance agents or CPAs. It’s not uncommon to see these firms constantly recommend renewals or reject new programs without exploring them in detail.

During the COVID pandemic there were several government incentives to help businesses navigate the challenging transition. Many CPAs were not aware of them and some recommended not applying, leaving thousands of dollars on the table. Management should ask vendors to constantly explore and present new and available plans and incentives. A passive agent not recommending new options and insisting on renewals should be a red flag.

One of the simplest ways to uncover savings is to keep track of business needs, contracts, and invoices. Contract auto-renewal clauses are a common source of overspending. These clauses automatically renew an agreement unless it is canceled within a specified window, often one to six months before the renewal date. As a result, businesses may remain locked in uncompetitive rates for years. This is common with garbage removal and telecom contracts.

We always recommend assigning someone the responsibility of reviewing contracts, invoices and available incentives. Regular reviews can help uncover unnecessary costs, avoid auto-renewals, encourage vendors to keep their rates competitive and identify potential incentives and savings opportunities.

Finally, be realistic about capacity. Assess whether your business has the time and resources to manage these reviews. If not, consider outsourcing the work to a specialized firm; otherwise, many opportunities will be missed, and significant money will be left on the table

Management often assumes fixed costs are beyond their control, focusing instead on areas it can influence more directly, such as sales and cost of goods. However, business needs, vendors, technology and plans may change, creating opportunities to reduce costs that could appear fixed or untouchable.

This article has outlined practical ways to identify those opportunities. Regular reviews and a more flexible approach to cost management can help businesses challenge old assumptions, shift management’s mindset, and improve profitability with minimal disruption to the product, service or operation.

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Ben Lapscher is a Principal with Expense Reduction Coaching (ERC), helping multiple businesses save millions of dollars in indirect expenses. Before ERC, Ben accumulated extensive operational and entrepreneurial experience in different industries and positions in local and multinational businesses. Ben has written several articles on Cost Reduction, Marketing and Entrepreneurship. He holds an Industrial Engineering degree from Universidad Católica Andrés Bello and an MBA from IESA, both in Caracas, Venezuela. He has also completed extension programs at Harvard Business School and Kellogg School of Management.

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