The Fixed Cost Trap: Why Ignoring Overhead Destroys Margins
Most businesses price products without factoring in fixed costs. Here's why that's a fatal mistake.
You sell handmade candles for $25 each. The wax, wick, and jar cost you $8. "I'm making $17 profit per candle!" you think. So you feel great when you sell 100 candles and make "$1,700 profit" that month.
Then you check your bank account and see you actually lost $800 that month. What happened?
The Fatal Mistake
You calculated contribution margin (revenue minus variable costs) and called it "profit." But you forgot about the $2,500/month that disappears whether you sell anything or not.
What Are Fixed Costs?
Fixed costs are expenses that don't change based on how much you sell. They're the bills that arrive every month regardless of your sales.
Common Fixed Costs:
The Real Math
Let's go back to those candles and show what really happened:
❌What You Thought
✓Reality
💡 You lost $800 while thinking you made $1,700. That's a $2,500 difference in your understanding of the business.
Your Breakeven Point
With $3,000/month in fixed costs and $17 contribution margin per candle, you need to sell:
At 100 candles sold, you were 77 candles short of breakeven. That's why you lost $800 (77 × $17 = $1,309, minus some rounding).
How to Price Correctly
Step 1: Calculate Total Fixed Costs
List every expense that doesn't change month-to-month. Be honest. Include your own salary.
Step 2: Estimate Realistic Sales Volume
Don't be optimistic. Use actual sales data or conservative estimates. Better to be pleasantly surprised than painfully disappointed.
Step 3: Calculate Fixed Cost Per Unit
Formula:
Example:
Step 4: Add Variable Costs + Fixed Costs + Profit
Why This Kills Businesses
When you ignore fixed costs in pricing:
You're Busy But Broke
Working 80 hours a week, selling tons of product, wondering why there's no money in the bank.
Death by Credit Card
Using credit cards to cover the gap between what you make and what you need, spiraling into debt.
Paying Yourself Last
Covering all expenses except your own salary, essentially working for free.
Slow Motion Failure
Gradually bleeding cash until you can't make rent and have to close.
The Bottom Line
Every product you sell must contribute to covering fixed costs. Not just variable costs. Not "eventually." Right from the start.
💡 Fixed costs are like rent on your business's existence. They don't care if you're profitable. They show up every month demanding payment. Your pricing must account for them.