Cost Management for Operators: Variable Costs

Welcome back to our cost management series. Today, we’re looking at variable costs – a fundamental yet dynamic component of your financial structure.

While not always as straightforward as fixed costs, variable costs are often where you’ll find fresh opportunities to maximize profit hiding in plain sight.  

What are Variable Costs?

By definition, variable costs are expenses that change in relation to the volume of tours or customers you serve. 

Unlike fixed costs, these expenses fluctuate, increasing as your operations scale up and decreasing when they wind down. 

This is the money you have to spend to make money, after you’ve covered your fixed costs. 

Getting a grip on these costs is essential for profitability and growth. 

Fuel and other per-tour costs 

Consider the costs per tour, such as fuel for vehicles. The more tours you operate, the higher your fuel costs will be. 

Maintenance costs for any type of vehicle, from a amphibious Duck Tour to a fleet of bikes or Segway scooters will vary depending on use. The more tours you run, the more often you’ll have to service your fleet, and the higher your maintenance costs will be.

Tasting tours incur food costs that vary depending on volume and add-on options.

Guides and part-time staff

Notably, the nature of our industry implies that variable costs often don’t manifest as tangible inventory. Instead, they could take the form of guides who are compensated based on the volume of tours or on an as-needed basis, unlike full-time staff that represent a fixed cost.

Third-party tours

Comissions on third-party tours are another variable cost. For instance, if a brewery partners with a city pass program to include a beer tour for pass holders, every time a city pass holder opts for the beer tour, the brewery incurs costs. These would include commission or partnership fees, extra tasting sets, or additional resources to cater to the increased number of visitors. These costs are directly proportional to the number of city pass holders availing the tour. The more the number of pass holders taking the tour, the higher the variable cost. 

Online advertising, social media, & paid search

Online advertising, social media campaigns, and paid search fluctuate based on the scale and frequency of campaigns, the targeted audience size, and the chosen platforms. As a business increases its advertising spend to reach more potential customers or diversify its marketing strategies, the associated costs rise.

Consider these expenses when calculating your customer acquisition cost (CAC).

OTAs 

The costs associated with advertising and Online Travel Agents (OTAs) also fall into this category. As your use of these distribution channels increases, so do the related costs.

Group sizes play a significant role in influencing variable costs, especially for vehicle-based tours. Take, for instance, a bus tour operation with a capacity of 35 customers per bus. If you have 40 customers booked, the cost of accommodating the extra 5 customers, requiring a second bus, is disproportionately higher than serving the first 35.

Action for operators

Understanding your variable costs is a key step towards efficient cost management. It enables you to make strategic decisions about pricing, scale, and operational efficiency.

So, here’s your homework for this week:
Assess your operation and identify your variable costs, their triggers, and their impact on your overall financial picture.
Calculate your CAC. How much does it cost you to bring a new customer in the door?

Here’s the formula for CAC:
CAC = Total sales and marketing spend / the total number of customers acquired over a given period.

Join us for the final post in our series, where we’ll bring it all together by discussing how to balance and manage your costs to capture the true value of your offers. The journey towards mastering your operation’s cost management continues.

Get your costs under control and realize the full value of your tours with Ventrata. For more information on Ventrata, check out Customer Success or request a demo

Contact sales@ventrata.com to chat to a member of our sales team