In order to gain clarity around how your consumer brand makes or loses money, you must first understand how it spends it via expenses. Only then can we take the analysis to the next step, which is to understand how to calculate, and manipulate, contribution margin (don’t be afraid of this term, it’s where the magic happens!!).

Fixed Expenses

A fixed expense (FE) is one that exists inside a business whether or not the business generates income. Unlike a variable expense, which exists only when the company generates income (see below), these are seen on the Profit & Loss statement (P&L) each month and are critically important to understand.  

If unclear whether or not it is FE, ask yourself this question, “Do we have to pay this even if the business doesn’t generate income?” If the answer is yes, it’s FE.  

Examples of FE are:

• Payroll, benefits, associated taxes and fees

• Office rent

• Utilities

• Recurring software

• Insurance (health, business, etc)

• Interest on debt

Adjusting your FE is one of the only things you have control over as a business.

Variable Expenses

A variable expense (VE) is one that is related to the generation of income. Think of this type of expense as one that only exists when the business generates income — unlike a fixed expense, which exists regardless of whether the business generates income.  

If unclear about a variable expense, ask this question, “Does the cost of this expense relate to the company generating income?” If yes, the expense is likely variable (excluding paid media/ad expenses that can be increased or decreased within 24 hours, see below).

A few examples of typical variable expenses are:

• Cost of Goods Sold (COGS)

• Credit card processing fees

• Shipping and fulfillment (in-house or with a 3rd party fulfillment service (3PL))

• Affiliate or referral fees

• Website fees related to sales (i.e. Shopify)

• Marketing agency fees

• Sales commissions

Ads/Paid Media

We look at Advertising a bit differently within Pentane. Yes, these are sales related expenses so considered variable, but we find that advertising/marketing can be changed quickly are more impactful to categorize separately.

So, within Pentane, we call Advertising any paid media that can be increased or decreased within 24 hours. This short timeline is important as it creates clarity around how to control the growth and scale within a business (i.e. How can we pour more fuel on the fire?).

Examples of paid media are:

• Facebook

• Instagram

• Twitter (X)

• Pinterest

• LinkedIn

• TikTok

• Snapchat

While other marketing costs are certainly considered “advertising”, Pentane  looks at ad costs that we cannot increase or decrease quickly as VE, instead of classifying them as “advertising expenses”. Examples of these, which we’ll classify as variable, not advertising, are:

• Influencers (planned out, can’t be increased within 24 hrs)

• Affiliate programs

• Marketing agency fees

• Bus benches

• Urinal cakes (yep, urinal cakes)
  

• Billboards

This company took Pentane and increased their revenue 234% in just 3 months and became profitable.

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