Identify What Your Business Is Going to Cost
Cost structures are the most significant expenses when using a specific business plan - how much you spend, how frequently you spend it, and whether it changes as volumes or sales fluctuate. For example, you might include rent, wages, raw materials, advertising, fitting out the store, or paying partners. You incur these costs in the process of value creation.
With so many businesses failing in their first three years (source: failory.com), staying on top of your costs is essential. It’s also worth recognizing that you should regularly re-evaluate your cost structure, just like the other BMC components. This is the only way to guarantee your company’s long-term viability.
Deconstruct the Costs
Any business will want to manage its costs to keep them at a minimum in the business plan. However, certain company models place greater value on low-cost structures than others. Many business models fall somewhere in between these two extremes, so it may be helpful to distinguish between two broad categories of business model cost structures: cost-driven and value-driven:
Low-cost flight providers like Southwest, easyJet, and Ryanair are examples of cost-driven business structures.
This category includes luxury hotels with their opulent amenities and premium services.
Features of the Cost Structure
You might also find a range of recognizable characteristics in cost structures, and it can be helpful to identify these in your business since it then becomes easier to learn from others:
Fixed Costs
These characteristics relate to fixed costs that are constant regardless of how many goods or services you produce. Salary, rent, and manufacturing facilities are some examples. Businesses with a high fixed cost percentage include those in the manufacturing industry.
Variable Costs
These are costs that change in proportion to the output of goods or services. An example of a business with many variable costs could be a consulting business, which is likely to be human resource heavy. They rely on a time and material model: for the business to provide more consultancy services, it needs to hire more consultants, representing an increase in variable costs.
Economies of Scope
Businesses generally realize economies of scope due to cross-benefits in a wider range of operations. For example, launching a new product can achieve economies of scope by leveraging marketing initiatives or distribution channels that you already use elsewhere. So the economy is that you don’t have to create new marketing initiatives or distribution channels for the new product.
Economies of Scale
Economies of scale refer to the benefits that a company might reap when its output grows. For example, you might find that when you buy resources in bulk, the purchasing rates reduce, and you can pocket the difference if the selling price of your product stays the same. The average cost per unit decreases as output increases due to these and other variables.
Understand Economies of Scale
In general, economies of scale depend on the size of the company. The amount of cost reduction increases with business size. Scale economies might be internal or external.
Of course, external circumstances influence external economies, and internal choices affect internal economies.
Economies of scale represent the cost savings and competitive advantages larger organizations have over smaller ones and are crucial for any business in any industry - even if you’re just starting.
Several factors contribute to economies of scale, resulting in cheaper per-unit costs.
More specialized human resources or technological integrations can increase production rates.
Buying in bulk or spending more with a specific supplier may result in reduced rates per unit purchased, reducing your expenditure.
Spreading your internal function costs over more manufactured and sold units will reduce your internal costs.
Your Turn! Look at the Cost Structure of The Founders Reading Guild
So, let’s apply cost structure thinking to The Founders Reading Guild. What would be the highest costs? To help you with this journey, ask yourself the following questions:
Is our business more cost-oriented or value-oriented?
What are the baseline costs that our business will incur?
Which key resources can be a heavy expense for the business?
What key activities may require high costs for the business?
How do our key activities generate costs?
Do these same key activities correspond to the chosen value propositions?
How much do we need to get started?
Which of our costs are fixed and which are variable? Is there any way we can shift from fixed to variable?
✅ Here’s how I have answered these questions.
Remember, this is a dynamic document - one of the beauties of the BMC is that you can update it regularly and learn as you go. So we may have missed something on this first effort, but then we realize later that there is another potential cost (we may discover this while completing the key partners’ section). Or maybe the world around us has changed. We can go back and update the field - enriching our understanding of the company along the way!
Fill in the Cost Structure Block
On the BMC, the Cost Structure block is close to the Key Resources and Key Activities since these blocks are most associated with costs. You might also notice it’s nicely positioned alongside Revenue Streams - more on that later.
Why don’t you try completing this field? Based on what we’ve covered in this chapter - the questions, the cost types, etc., how would you complete the cost structures section of The Founders Reading Guild’s BMC?
✅ Here’s how we completed the Cost Structures block on this canvas. How does it compare to yours?
Let’s Recap!
The cost structure includes the most significant expenses your business incurs to complete all the activities you need to do and acquire all the necessary resources.
Cost-driven businesses focus more on managing costs and can pass on lower pricing to their customers.
Value-driven businesses focus more on value creation. This means they might invest in higher-quality materials to enhance the value of their offers.
Economies of scale are the advantages that can sometimes occur due to a business increasing its size.
Great job identifying the cost structure for your business. Next we will explore the relationships you build with your customers.
