The Business Model Canvas (Also known as Canvas Business Model) is a popular innovation tool. One of the building blocks in the Business Model Canvas is cost structure. Our experience is that people often complete the cost structure building block of the Business Model Canvas too superficially and thoughtlessly. We aim to change that, which is why we have written an article. Are you ready to delve into the cost structure Business Model Canvas building block?

What is the cost structure Business Model Canvas building block?

The cost structure component of the Business Model Canvas outlines all the expenses that a company will incur to operate its business model. These costs are associated with creating and delivering value to customers, maintaining customer relationships, and generating revenue. The cost structure helps businesses to identify and manage their financial resources effectively.

What kind of costs are there?

Costs in the cost structure can generally be categorized into two main types:

1. Fixed costs

These are costs that remain constant regardless of the volume of goods or services produced. Fixed costs provide stability but require careful management to ensure they do not overwhelm the business, especially in the early stages.

Examples of fixed costs are:

• Rental of offices, factories, cars, trucks etc.
• Salaries of payroll staff
• Insurance include rent, salaries, and insurance.
• Subscriptions, such as monthly costs for streaming services, telephone subscriptions or magazines.
• Depreciation, the cost of writing off assets such as equipment, vehicles or buildings.

2. Variable costs

These costs fluctuate directly with the level of production or sales. Variable costs can be more manageable in fluctuating markets as they align more closely with revenue levels.

Examples of variable costs are:

• Raw materials or supplies: the costs of materials used in production.
• Production costs: the direct expenses incurred in producing the product.
• Temporary labor costs: the expenses for hourly-paid workers.
• Shipping and transportation costs: the costs to deliver the product to the customer through various channels.
• Energy and utilities: the costs for electricity, water, and gas, which vary based on usage or production volume.
• Hiring external freelancers

Why is it important to understand the cost structure Business Model Canvas building block

A clear understanding of the cost structure Business Model Canvas building block is crucial for several reasons:

1. Profitability analysis: By mapping out all costs, businesses can calculate their break-even point and set realistic profitability targets.
2. Cost management: Identifying significant cost drivers allows businesses to implement cost-saving measures and improve overall efficiency.
3. Strategic planning: Understanding cost implications helps in making informed strategic decisions, such as pricing strategies, product development, and market expansion.
4. Resource allocation: Businesses can better allocate their financial resources by understanding which areas of the business incur the most costs and which generate the most value.

It is important to realize: incurring costs is inevitable and is necessary to realize the value proposition. The relationship between costs and revenue streams is very important for every company. “The money tap should not drip, but flow.” In some industries, an extremely cost-efficient operation is the difference between success or failure. For example the transport sector. In other industries, keeping a handle on costs is of course important, but reducing costs is not the most important success factor.

Discuss the choices made in the business model once the cost structure is mapped out.

The costs in the Business Model Canvas are always related to choices made in other building blocks. It is interesting for every company to look at the cost structure from a strategic perspective. Here are examples of questions about the cost structure that can trigger a different design of the business model:

• How does our cost structure compare to our competitors?
• Are there other business model options that give us a strong competitive advantage in terms of costs?
• How can we reduce fixed costs without compromising quality?
• Are there any key resources or activities that could be outsourced more cost-effectively?
• Can we achieve economies of scale by increasing production or expanding markets?
• Are there opportunities to negotiate better terms with suppliers to lower raw material costs?
• What cost-saving partnerships or collaborations could we pursue to share expenses?

How can Business Model Hacks help to gain a competitive advantage on the cost structure Business Model Canvas building block

Business Model Hacking is a powerful method to create new business model options for your company. The +200 hacks give you new ideas and help you create non-obvious business model options. You may well find a new model with a game-changing cost structure. Get the book now!

Are you ready to boost your business?

Immerse yourself in the Business Model Canvas cost structure building block, find smart alternative ways to reduce your cost structure and take advantage of it! Need help? Discover our Business Growth Consulting services.