Translation: Cost Stickiness = cost stickiness / asymmetric cost behavior. The adjective: sticky costs.

Simple definition: Imagine a company operating a logistics network that expands its fleet and hires new staff when demand rises. When demand contracts a few months later, management does not immediately reverse the decision because it believes the decline is temporary, and that laying off staff today and then rehiring and training them a quarter later would cost more than retaining them. The cost therefore remains in place as a deliberate management decision, not because of a physical constraint. This is the essence of the phenomenon: it is driven by a management decision, not by the nature of an asset.

Key note: Stickiness is not synonymous with fixed cost. A fixed cost does not change with volume at all, by its accounting definition, whereas a sticky cost does respond to volume, but its response is asymmetric between increases and decreases. For this reason, it is measured in practice using selling, general, and administrative expenses and cost of revenue, rather than a purely fixed-cost line item.

How it is calculated: The academic measure established by Anderson, Banker, and Janakiraman in their study published in the Journal of Accounting Research in 2003 is based on a logarithmic regression containing an interaction term that isolates periods of decline. It produces two coefficients: the first measures the cost response to every 1% increase in sales, while the second measures its response to every 1% decline. The simplified measure sufficient for an individual investor is an approximate ratio:

Response ratio = (% change in operating costs) ÷ (% change in revenue)

The key to interpreting it is that the closer the ratio is to 1, the more flexible and responsive the cost; the closer it is to zero, the greater the stickiness and the more fragile the margin. The result reached by the aforementioned study, based on a broad sample of U.S. companies, was that selling and administrative expenses rise by approximately 0.55% for every 1% increase in sales, while they decline by only 0.35% for every 1% decrease.

What does this mean for you?

A company with a sticky cost structure moves toward losses more quickly after any sales shock, even if the decline is limited; this is known as operating leverage risk. A contractual notice period for terminating contracts also gives management time to reallocate assets and staff before the effect appears in the financial statements, making it a provision worth reading in disclosures rather than dismissing as a legal detail. Likewise, concentrating revenue in one large customer while maintaining a sticky cost structure puts the company in a weak negotiating position. In practice, investors monitor three items: cost of revenue as a percentage of revenue from quarter to quarter; employee costs within general and administrative expenses; and depreciation expense on right-of-use assets under IFRS 16, which continues throughout the lease term regardless of the level of activity.

Frequently asked question: Do costs remain sticky forever?

Answer: No. Stickiness is a short- to medium-term phenomenon arising from contractual obligations and adjustment costs. Over the long term, all costs are variable, as management can restructure its assets, reallocate staff and equipment to new contracts, or eliminate excess capacity. The real investment question is not whether stickiness will end, but how long it will take to end and how much it will cost the margin in the meantime.