Does customer care/service cost classify as fixed or variable?

customer service management
New answer on Sep 18, 2020
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Shashank asked on Sep 17, 2020

I know that costs that increase with sales volume classify as variable costs and costs that remain fixed irrespective of sales volume classify as fixed costs. (Correct me if I'm wrong or less appropriate)

By this understanding, say if the sales volume increase, the complaints increase, and hence we will have to hire more customer care/service executives with increasing sales volume. This logic makes customer service costs variable.

However, I have seen some people arguing that customer service is a fixed cost. I want to know the rationale behind their thought. It really fudges my whole understanding of the concept.

In search for some insights and deeper understanding.

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Ian
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replied on Sep 17, 2020
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Hi Shashank,

That's the right definition. I.e. variable costs are a cost that increases when 1 more unit of a product/service is sold.

The answer to your question truly depends on the cost structure of your company.

Does your company employ x call centre staff with an annual salary of $xxxk per year? If so, Fixed Costs.

Alternatively, does your company pay call centre staff hourly, and have them go overtime when there are more complaints? And/or, do you outsource the calls to, say, the Philippines, and pay per call/minute? In which case, we're talking Variable Costs.

All that being said, I would generally assume customer care/service is Fixed Cost. Why? It's included in the SG&A AND any changes are step changes. What I mean, is, if you sell 1,000 more goods don't you have to build another factory and therefore factories are variable costs? Of course not...these are larger investment decisions :). Likewise, increasing call centre capacity is generally a step change decision (i.e. buy another call centre, hire 100 more people, etc. etc.)

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Mehdi
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replied on Sep 17, 2020
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Hi,

That is a good question. The best way to best classify this is by asking the right question to the interviewer. Some costs can be classified as fixed in some situations and they can classify as variable in others, this all depends on the business model of the company.

In this situation, ask yourself if you can add/remove people easily to the Customer Services team in function of the production/sales? Is the volatility in sales determining the number of people working in the Customer Services department? What if your level of service improves in a particular month (means less complaints), would you be firing people from the Customer Services team the following month?

I think all those questions would help you decide if this is a fixed or variable costs, but from my personal experience & perspective, I believe it would qualify as a fixed costs since you will not be adding/removing people every month based on the sales of the previous month/quarter!

I am happy to discuss this further if needed.

All the best,

Mehdi

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Vlad
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replied on Sep 17, 2020
McKinsey / Accenture Alum / Got all BIG3 offers / Harvard Business School

Hi,

Depends on the business. E.g. in retail returns are considered as customer care and they are variable. In software B2B services I would assume its fixed

Best

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Anonymous replied on Sep 17, 2020

Hi,

This is a fair question. You always need to confirm that with your client/interviewer to align your understanding. Customer service is a good example, depending on the flexibility of the client it can be considered as a fixed or a variable cost.

To go to the extreme if you don't sell anything, you will not have any fixed cost :).

Bertrand

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Clara
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replied on Sep 18, 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

It´s a good question, but totally depends on each business model.

As a rule of thumb ask yourself: are this customre services people going to be here at the end of the month if we have a decline of 50% of the sales?

Cheers,

Clara

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Ian gave the best answer

Ian

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