How Suraj's Rides Taught Him the Real Cost of Operational Leverage – Simply Explained

Suraj’s Big Plan: Ride, Earn, and Grow!

Suraj had always been smart about money—or so he thought. When he bought a brand-new bike on loan, he believed it was a solid investment.

His plan was simple: Sign up on Hello and Flasho, take as many rides as possible, and make a lot of money.

And for a while, it seemed to work! Money was coming in, and Suraj felt like he was on the path to financial success.

But soon, something felt off. He was making more money, but his savings weren’t growing. Where was all the money going?

Suraj’s Miscalculation

Suraj had been tracking his earnings, and in his head, the only major expense was fuel. More rides meant more fuel costs, but that was obvious. Right?

One day, he crunched the numbers:

• Month 1 Earnings: ₹70,000

• Fuel Expense: 40% of earnings (₹28,000)

• Net Income (after fuel): ₹42,000

“So if I make more money,” he thought, “I'll just pay more for fuel, and keep the rest!”

To test this, he switched from Hello to Flasho, an app that had higher ride volume but lower fares.

• Month 2 Earnings: ₹75,000

• Fuel Expense: 40% of earnings (₹30,000)

• Net Income (after fuel): ₹45,000

His earnings increased by ₹5,000, and he assumed he was now making more money.

But then came the second month on Flasho. Demand dropped, and he struggled to find as many rides. His earnings fell to ₹50,000, and suddenly, his expenses started feeling heavier.

Something wasn’t right…!

The Dinner Where It All Made Sense

Confused and slightly frustrated, Suraj visited his friend Raju for dinner. Despite his forced smile, Raju could sense something was wrong.

Raju: “You seem happy, but I know that face. What’s wrong?”

Suraj sighed. "The first month on Flasho was amazing—I made more money. But now, there aren’t enough rides, and my earnings have dropped. My expenses are still the same, and I feel stuck!"

Raju: "You sound just like me before I understood financial leverage. Remember I told you that Lalitha explained it to me? That was a game-changer for my ice cream business! You should let her take a look at your numbers."

Suraj: "Lalitha ji, please help me figure this out!"

Lalitha smiled. "Let’s look at your expenses beyond just fuel."

Breaking Down the Real Costs

Lalitha grabbed a notebook and asked, “Besides fuel, what else do you pay for?”

Suraj thought for a moment and then listed:

✅ 10% commission to the aggregator.
✅ ₹10,000 monthly EMI for his bike loan.
✅ ₹2,500 for servicing and maintenance.

Lalitha quickly jotted down the real numbers:

Lalitha tapped on the notebook. “Your revenue increased by 7%, but your profit increased by 10%. That’s because of operational leverage.”

Suraj blinked. “Operational what?”

What is Operational Leverage?

Lalitha explained, “You have some fixed costs, like your EMI and servicing. These don’t change, no matter how many rides you complete.”

“So when your revenue increased, those fixed costs stayed the same, meaning more of your extra earnings stayed with you.”

She continued, “This is called operational leverage—when a business has high fixed costs, any increase in revenue leads to a higher percentage increase in profit.”

✅ If revenue increases, profits grow even faster.
❌ If revenue drops, profits shrink even faster.

Operational Leverage: The Double-Edged Sword

Lalitha leaned forward. “But be careful. Operational leverage can work against you too.”

Suraj: “How?”

Lalitha: “Let’s consider your last month, where you made only ₹50,000”

She adjusted the table:

Lalitha pointed at the last row. “See? Your revenue dropped 33%, but your profit fell by 50%! That’s because your fixed costs didn’t change.”

Suraj sighed. “So, it’s a double-edged sword. More revenue means higher profits, but if earnings fall, I lose money faster.”

Lalitha nodded. “Exactly. That’s why businesses with high fixed costs need to be very sure of demand before committing to them.”

The Decision to Switch Back

Suraj sat back, thinking. “So my expenses with Flasho weren’t a problem when I had high demand. But when demand dropped, I lost money faster because my fixed costs didn’t change.”

Lalitha nodded and said, “Exactly”

Suraj thought about it. He had consistent demand on Hello, even if the fares were slightly lower. With Flasho, his income was unpredictable.

The next day, he switched back to Hello. Even if he made a little less per ride, at least he wasn’t stuck stressing about unstable earnings.

Final Takeaway: Smart Use of Operational Leverage

Suraj finally understood. His real costs weren’t just fuel.

To use operational leverage wisely, he needed to ask himself:

✅ Do I have stable demand?
✅ Can I afford the losses if revenue drops?
✅ Is my pricing high enough to cover my fixed costs?

“I guess I need to be more careful before taking on big fixed costs,” Suraj admitted.

Lalitha smiled. “Now you’re thinking like a smart businessman.”

How Is Operational Leverage Different from Financial Leverage?

By now, you’ve seen how operational leverage works — but there’s another kind of leverage too: financial leverage (remember Raju’s story? 😉).

Both involve risk and reward, but they apply in different ways.
To make it super simple, here’s a quick side-by-side comparison to help you remember:

Here’s a very basic table to help you understand both in one glance:

(P.S. Want to understand how financial leverage helped Raju? Read here)