Foundamental | Why Fixed Costs Could Be Your Best Strategic Move

Why Fixed Costs Could Be Your Best Strategic Move

January 9, 2025

Discover why shifting from variable to fixed costs might be the secret sauce for AEC tech startups. Learn from successful examples in robotics, cloud manufacturing, and outcome-as-a-service models.

Patric Hellermann

Shub Bhattacharya

Why Fixed Costs Could Be Your Best Strategic Move

Remember when everyone said "go asset-light" and "everything must be variable costs"? That's been the venture capital playbook for the last 15 years. But what if we told you that in construction tech, the opposite could be your winning strategy? We're diving into why some of the most successful AEC tech companies are actually embracing fixed costs – and selling them as variable costs to their customers.

This Week On Practical Nerds - tl;dr

SaaS scales by fixing costs but rarely adopts variable pricing
Cloud models thrive by locking fixed capacity, selling variably
Construction robotics succeed by aligning fixed costs with variable pricing

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SaaS Scales By Fixing Costs But Rarely Adopts Variable Pricing

Why Do Most Construction Tech Companies Get Their Cost Structure Wrong?

The tech industry has been obsessed with software-as-a-service for good reasons. The initial appeal is obvious: invest once in creating the product, then sell it multiple times with minimal incremental costs. The classic software model started with selling physical discs and annual updates, evolving into the cloud-based subscription model we know today.

What made SaaS so attractive to investors was its ability to convert distribution costs from variable to fixed. Instead of paying for each sales interaction, companies could build digital distribution channels that scale efficiently. This transformation helped create massive success stories like Microsoft, Oracle, and Salesforce.

But here's what's often overlooked: while SaaS companies produce fixed costs, they also sell their product as a fixed cost to customers. Think about it – when a construction company buys a software license, they pay the same amount whether they use it for a $10,000 project or a $10 million project. This misalignment with how construction companies prefer to purchase and manage their costs creates friction in adoption.

The real opportunity lies in producing fixed costs but selling them as variable costs. Take payment infrastructure companies or cloud storage providers like AWS. They invest heavily in fixed-cost infrastructure but charge customers based on usage. This model resonates particularly well in construction, where companies are accustomed to costs that scale with their revenue.

Key Insight: The most successful tech companies in construction don't just focus on being "asset-light" – they focus on aligning their revenue model with how their customers want to buy.

Cloud Models Thrive By Locking Fixed Capacity, Selling Variably

How Are Cloud Manufacturing Companies Revolutionizing The Industry?

Cloud manufacturing represents a fascinating evolution in construction tech. Companies like InfraMarket, Metalbook, and Zetwork are pioneering a model that combines the efficiency of fixed-cost production with the flexibility of variable-cost selling.

Traditional marketplaces simply match buyers with suppliers, operating on a purely variable cost basis. Cloud manufacturers take it further by securing manufacturing capacity through long-term agreements. They might guarantee a manufacturer 90-100% utilization for three to six months in exchange for preferential pricing.

This approach creates interesting dynamics. The manufacturer calculates their earnings based on aggregate throughput rather than per-unit pricing, often accepting lower unit prices in exchange for guaranteed volume. For the cloud manufacturing platform, this creates a pseudo-fixed cost structure – they've locked in capacity at favorable rates but can sell it at market prices.

What's particularly exciting is the emergence of "Cloud Manufacturing 2.0." These newer companies are incorporating brand elements, IP, and additional services into their offerings. They're not just arbitraging manufacturing capacity; they're building comprehensive solutions that create more value for customers.

Key Insight: Success in cloud manufacturing comes from turning predictable demand into competitive advantage through fixed-cost capacity commitments.

Construction Robotics Succeed By Aligning Fixed Costs With Variable Pricing

Why Did Early Construction Robotics Companies Struggle With Their Business Model?

The construction robotics space offers perhaps the most compelling example of why rethinking the fixed versus variable cost equation matters. Early players like Built Robotics and Canvas Robotics raised significant capital ($100M+ and $60-70M respectively) but struggled with their go-to-market approach.

These companies typically followed the conventional wisdom: sell robotics-as-a-service through annual or monthly subscriptions. But this model misunderstood what construction companies actually want to buy. They don't want to lease a robot for $100,000 per month regardless of utilization – they want guaranteed outcomes.

Enter companies like Monumental, which takes a radically different approach. Instead of selling or leasing their brick-laying robots, they offer themselves as a subcontractor. Customers don't pay for the robot; they pay for completed walls. This variable cost model aligns perfectly with how construction companies traditionally purchase services.

The innovation here isn't just in the technology – it's in the business model. Monumental produces fixed costs (building and maintaining robots) but sells variable costs (completed construction work). This approach addresses both the trust deficit in construction and the industry's preference for outcome-based pricing.

Key Insight: Success in construction robotics isn't about having the best technology – it's about packaging that technology in a way that matches industry buying patterns.

Conclusion: The Fixed-Variable Advantage Framework

To succeed in construction tech, companies should:

Emulate SaaS by transforming operational variability into fixed costs but adopt pricing models tied to customer usage or revenue to enhance alignment and scalability.
Design pricing models that align with customer preferences by charging based on usage or outcomes, making fixed-cost investments flexible and appealing.
Focus on delivering measurable results (e.g., completed projects or specific outcomes) to align with industry norms, foster trust, and drive adoption.

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