Step costs: why the next hire is a jump, not a slope

Key takeaways

Step costs are costs that stay level across a range of activity and then jump when a threshold is crossed. Staffing is the classic example: one administrator copes until volume passes their limit, then a second full salary is needed for a small amount of extra work. Buying the excess as flexible hours smooths the step.

• Step costs: flat within a range, then a jump.
• Each hire adds about £34,500 a year at a £30,000 salary.
• Cost per order rises sharply just after each step.
• Flexible hours fill the gap between steps.

What are step costs?

Step costs, also called stepped fixed costs or semi-fixed costs, are expenses that remain constant over a range of output and increase by a fixed amount when output exceeds that range. Common examples are an additional employee, another vehicle, a second shift or a larger office.

• How outsourcing helps small businesses scale without hiring
• Operating leverage: why fixed costs make growth risky

Why is staffing a step cost?

Staffing is a step cost because people are employed in whole or large part roles. If one administrator can process about 500 orders a month and you reach 550, the extra 50 orders need capacity. Hiring a second person supplies capacity for another 500, most of which is unused until volume catches up.

• Headcount vs capacity: what a growing business really needs

What happens to cost per order at a step?

Cost per order jumps. In an illustrative case, one administrator costing about £2,870 a month handles 500 orders, or £5.74 an order. At 550 orders with two administrators the cost is £5,740 a month, or £10.44 an order. Margin falls until volume grows enough to fill the second role.

• 500 orders, one administrator: about £5.74 per order.
• 550 orders, two administrators: about £10.44 per order.
• 550 orders, one plus 15 flexible hours a week: about £6.64 per order.

• Staff utilisation rate: the cost of paid idle time

How do you smooth a step cost?

Smooth the step by buying only the capacity you need. Fifteen hours a week from a managed team at an indicative £12 an hour is about £780 a month. Added to one administrator, that covers 550 orders for about £6.64 each. When volume reaches a level that fills a second role, decide then whether to hire.

• Overflow outsourcing: hand off only work above your limit
• Scaling an outsourced team up and down: how it works

Where else do step costs appear?

Step costs appear wherever capacity comes in lumps. A management layer is a step when the team passes the owner's span of control. Premises are a step when desks run out. Software tiers and vehicles behave the same way. Each one is worth identifying before growth reaches it.

• The first supervisor or manager.
• A larger office or second site.
• The next software pricing tier.
• Another vehicle or machine.

• Span of control: how many people can one manager run?
• Outgrowing the office: grow the team without a bigger lease

When should you take the step?

Take the step when the extra capacity will be mostly used within a few months, or when the role brings something flexible hours cannot, such as leadership or deep product knowledge. A step taken into proven, growing demand is an investment. A step taken for a temporary peak is a cost.

• When to outsource and when to hire

What does this look like in practice?

A pattern we see in UK firms just past a capacity threshold: a second customer service person is hired because the first is overwhelmed on Mondays. From Tuesday to Friday there is not enough work for two. Covering the Monday peak with flexible hours would have cost a fraction of the second salary.

• See client work
• BPO Solutions for UK businesses

Step cost checklist

Run this before approving a hire for extra volume.

• Estimate the volume one person can handle.
• Measure how far current volume exceeds it.
• Calculate cost per order before and after a hire.
• Price the excess as flexible hours.
• Estimate when volume would fill a second role.
• List other steps coming: manager, premises, software.

• Workforce planning for growth: roles to hire, roles to buy
• How much spare capacity should a small business carry?

Next step

Tell us your monthly volumes and how many people handle them. We will show where the next step falls and what it would cost to smooth it.