Variable costs are expenses that go up or down based on how much you produce. Produce more, costs rise. Produce less, costs fall. They move in direct proportion to output — unlike fixed costs which stay the same regardless.
Examples: raw materials, direct labor, packaging, shipping, and sales commissions. If you make 100 chairs, you need wood for 100 chairs. Make 500 chairs, you need 5 times the wood. The wood cost is variable — it changes with production volume.
Understanding variable costs is critical for pricing. Your price must cover variable cost per unit + a share of fixed costs + profit margin. The contribution margin (price minus variable cost) tells you how much each sale contributes toward covering fixed costs. High variable cost businesses (like restaurants) operate very differently from low variable cost businesses (like software).