After all, only big corporations could afford the large fixed cost investments required to build mass production facilities.
But by the beginning of the 21st century, controlling large scale infrastructures with high fixed costs was no longer required for business success in a a growing number of markets. And in many cases, fixed costs had become a business liability.
New technologies had reduced the costs of starting and operating a business. And outsourcing, partnering and business infrastructure service companies (UPS for logistics, contract manufacturers for production, Amazon on others for IT and web services, etc.) created the ability to start and operate businesses using a high degree of variable costs.
Variable cost business models are having a major impact on the small business sector by greatly increasing the number and viability of niche markets. Variable cost business models:
1. Lower the capital costs required to enter and serve niche markets. Lower capital costs also reduce the risk of serving niche markets.
2. Provide niche producers cost advantages relative to their larger competitors.
The chart above shows the classic cost accounting model for both fixed cost and variable cost business models. Below the volume where economies of scale kick-in, variable cost business models enjoy a substantial cost and pricing advantage.
The increasing use of variable cost business models is not the only trend driving the growth of niche markets.
Customer are increasingly looking for good and services that meet their specific needs. The Internet is allowing niche producers and customers to find one another more easily. And technology is lowering the costs of serving niche markets.
Combined, these trends are making more and more niche markets economically viable.
And we are seeing more and more examples of small businesses using innovative variable cost business models to exploit niche markets and out maneuver larger competitors.