Establish Your Cost Structure
Looking at the product side of the business model canvas, let’s do a deep dive on the cost structure. Here we’re focusing on your fixed and variable costs which are the sum of all your resources, activities and costs of partnering up with people.
We need to look at how many people we need, what the associated costs are, any assets or properties we need and how much it is going to cost.
The key here is not to start crazy balance sheets and spreadsheets but really to keep it simple and keep it high level and strategic. Depending on your value proposition, your business model may be more geared towards cutting costs or driving up value.
To drive down costs, price-leading companies might want to maximize their automation processes and increase their outsourcing capabilities.
A great example of a cost-leading business is The Warehouse Group, where all Kiwis find a bargain. All activities and its business model focus on automation of processes and maximizing outsourcing, giving it an ideal cost-saving perspective.
On the other hand, companies that focus on high-value creation are less concerned about cost savings and more concerned about what additional value they can provide to their customers.
Ideal examples would be premium consulting companies that have high face-to-face contact, as well as luxury brands such as the Hilton hotels and other hotel brands.
The key value proposition is instead of added benefits such as better customer service, higher face-to-face point of contact.
One more aspect to keep in mind in the cost structure is economies of scale and economies of scope.
A lot of companies will work toward increasing their scale of operation in order to cut down costs and minimize expenditures.
A prime example in New Zealand would be Fonterra and it's milk production. By increasing its purchasing power, Fonterra's able to secure itself some bulk pricing and is, therefore, able to keep costs very low.
KEY TAKEAWAYS!
To get started on your own cost structure, keep a couple of questions in mind.
What do you need to create your Value Proposition?
Which Resources will you need?
What activities will you perform?