Your cost structure as it relates to the Business Model Canvas is closely related to your value proposition.
At its highest level, cost structures are either cost or value focused.
- Cost-driven structures are focused on keeping costs or expenses down.
- Value-driven structures are focused on providing more value or more revenue through premium offerings or services.
Companies that embrace a cost-driven structure use automation or outsourcing to keep internal costs low, often resulting in competitive pricing. Operational excellence is often at the core of the business model of cost-driven structures and are exemplified by WalMart and McDonalds. Because margins are small, a business that is cost-driven has to rely on volume to achieve satisfactory returns.
Companies that embrace a value-driven structure use customer intimacy and high-end components to create premium products. Customers that buy value-driven products and services are less price conscious and value quality, performance, and convenience over price. Nordstrom and Rolex are examples of companies that have value-driven structures.
Another element of a company’s cost structure is the ratio of fixed to variable costs they have know as Operating Leverage. High variable-costs relative to fixed-costs have less upside reward, but also less downside risk. By contrast, low variable-costs relative to higher fixed-costs have high upside rewards but have substantially higher downside risk if break-even volumes are not reached.
When considering cost structures, you should consider what are the most important costs that need more attention and which have less impact on the quality of your product or service? Also, consider which key resources and activities are most expensive and whether you benefit from moving up or down the value chain?
Do you understand your cost structures?
There is also a FREE Podcast Series we offer on Applying the Business Model Canvas
For more detailed information on how to apply the Business Model Canvas to your business, check out my book:
Design, Align and Test Your Ideas
Applying the Business Model Canvas, A Practical Guide For Small Business is a book that was written for the entrepreneur trying to come up with a workable new business model. By using the Socratic method of asking and answering questions for each of the 13 building blocks of the Business Model Canvas and the Value Proposition Model the reader will be able to turn abstract ideas into a practical business model in no time.
The book Applying the Business Model Canvas, A Practical Guide For Small Business is a concise and easy to read guide packed with solid advice and examples that will help you refine your new business ideas before you launch helping you avoid costly mistakes.
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