Business Model Canvas - Building Blocks - 09 - Cost Structure

Cost Structure = all costs incurred to operate a business model

Some business models, though, are more cost-driven than others. So-called "no frills" airlines, have built business models entirely around low Cost Structures.

Questions to ask ourselves while thinking about Cost Structure:

• Which are the most important costs inherent in our business model?
• Which key resources are the most expensive?
• Which Key Activities are the most expensive?

It is useful to distinguish between two broad classes of business model Cost Structures:

• cost driven
• value driven

Many business models fall in between these two extremes:

1. Cost Driven:
• focus on minimizing costs wherever possible.
• This approach aims at creating and maintaining the leanest possible cost structure.
• No frills airlines, such as SpiceJet and Indigo typify cost driven business models.
2. Value Driven:
• Some companies are less concerned with the cost implications of a particular business model design and instead focus on value creation.
  
• Premium value propositions and a high degree of personalized service usually characterize value driven business models.
  
• Luxury hotels, with their lavish facilities and exclusive services, fall into this category.

Cost Structures can have the following characteristics:

• Fixed Costs:
• Costs that remain the same despite the volume of goods or services produced.
• Examples include salaries, rents, and physical manufacturing faciliites.
• Some businesses such as, manufacturing companies are characterized by a high proportion of fixed costs.
• Variable Costs:
• Costs that vary proportionally with the volume of goods or services produced.
• Some businesses such as - music festivals are characterized by a high proportion of variable costs.
• Economies of Scale:
• Cost advantages that a business enjoys as its output expands.
• Larger companies, for instance, benefit from lower bulk purchase rates.
• This and other factors cause average cost per unit to fall as output rises.
• Economies of Scope:
• Cost advantages that a business enjoys due to a larger scope of operations.
• In a large enterprise, for example, the same marketing activities or Distribution Channels may support multiple products.