Cost Structure Business Model Canvas

The Cost Structure building block of the Business Model Canvas details the monetary cost of operating as a business. Cost structure represents all the costs a business will incur under a specific business model, especially those costs to maintain the key resources that make up the core business model.

Understanding cost structure in the Business Model Canvas

This is an important building block in the BMC, with 90% of businesses failing in under three years because they underestimate the cost of creating the goods and services outlined in their value proposition.

Operational costs encompass expenditure related to employees, infrastructure, activities, and partnerships. These costs are defined by three other BMC building blocks: value proposition, revenue streams, and long-term customer relationships. To gain clarity on the exact cost structure, however, it is important businesses also detail key resources, activities, and partnerships. 

These are a few of the questions a business must consider when creating its cost structure:

  • What are the fundamental costs of the business model?
  • Which key activities cost the most to perform? Which key resources cost the most to perform?
  • How do the key activities drive costs?
  • Are key activities matched to the value proposition?
  • Do costs become variable or remain fixed by considering other structures?

Cost structure types

While minimizing cost is fundamental to good business, organizations nonetheless employ different cost structure strategies. Some are on a dogged mission to reduce costs as much as possible, while others pride themselves on their luxury or bespoke product ranges. In truth, most organizations are somewhere in between.

Various strategies occupy opposite ends of a cost structure spectrum, with a cost-driven structure at one end and a value-driven structure at the other.

With all that said, let’s take a look at both types in more detail:

  1. Value-driven structure – a strategy where there is a complete focus on customer value at the expense of cost. Value is created by customizing the product or service to individual preferences. Hyatt Hotel repeat customers are on a first-name basis with hotel staff and are provided with a personalized room before they arrive.
  2. Cost-driven structure – which focuses on minimizing the cost of a product or service wherever possible. Businesses focus on creating a lean cost structure through cheap pricing, automation, and the outsourcing of costly activities. Walmart uses immense economies of scale to reduce costs to a point where other retailers cannot compete. Most budget airlines reduce costs by increasing seat capacity, not offering meals, and limiting luggage size.

Cost structure attributes

A typical cost structure, regardless of strategy or type, has one or more of the following attributes:

  • Economies of scale – where a company with a high output quota benefits from a lower cost per unit amount. This occurs because large volume orders spread fixed costs more evenly than smaller orders. Economies of scale are common in large organizations that make bulk purchases from a supplier.
  • Economies of scope – here, costs are reduced when an organization expands its operational scope or invests in multiple markets. To derive maximum benefit from economies of scope, each product should require similar marketing messages or utilize the same distribution channel. 
  • Fixed costs – or business expenses that remain constant irrespective of volume. Fixed costs can be time-bound, such as a fortnightly employee salary or monthly rent for an office space. Manufacturing companies are also subject to fixed costs such as equipment and facility rental. Fixed costs do not remain fixed indefinitely and will change over time while remaining relatively stable.
  • Variable costs – these are costs that are heavily dependent on volume output and are influenced by supply and demand. In a production scenario, variable costs may be associated with sourcing raw materials, utility bills, and employee labor. 

Cost structure examples

In the final section, let’s take a look at a few cost structure examples from some notable companies.

Netflix

The cost structure of Netflix was significant enough in the company’s early days to impact cash flow and growth. Some of these costs include:

  • The acquisition, production, delivery, and licensing of streaming content. These are likely to be the largest costs for the company today.
  • Platform maintenance.
  • Software development.
  • Research and patents.
  • Amazon Web Services (AWS) for database, analytics, recommendation engines, and video transcoding, to name a few functions.
  • Data centers to provide streaming content.
  • Marketing, human resources, and related infrastructure.

Netflix has also benefitted from economies of scope and key activities that match its value proposition.

Nike

The cost structure of Nike is such that the company pockets a relatively small amount of profit from each item it sells. Costs associated with the sale of a pair of sneakers, for example, include:

  • Retail markup – this is as high as 50% of the total purchase price in some cases.
  • Sea freight and insurance.
  • Free on Board (FOB) costs, which cover the cost of shipping from the factory.
  • Selling, general, and administrative expenses.
  • Customs duties and taxes.

In addition to these costs, Nike spends billions on advertising, marketing, sponsorships, brand presentation, and other promotional costs. In 2021, this amounted to $3.11 billion.

Tesla

Tesla’s cost structure is characterized by fixed manufacturing costs. For each vehicle that rolls off the production line, these include equipment (20%), body (12%), chassis (7%), drive system (15%), battery (35%), and other (11%).

In addition, Tesla has the following costs:

  • Research and development – consisting of personnel costs related to engineering, research, prototyping, contract and professional services, and costs from amortized equipment.
  • Selling, general and administrative expenses – personal and facilities related costs such as stores, sales, finances, human resources, information technology, and any fees related to legal or contract services and litigation settlements.
  • Restructuring and others – including employee termination costs, disposal of tangible assets, facility sub-leasing losses, and impairment losses.
  • Interest and taxes.

Airbnb

Airbnb has a relatively simple cost structure when compared to some of its competitors in the hotel industry. This is because the company does not own the accommodation listed on its website and as a result, avoids the many costs associated with hospitality staff and hotel upkeep. 

The company’s cost structure consists of the following:

  • Cost of revenue – which includes online payment processing fees that are paid to Visa and Mastercard. Cost of revenue also encompasses insurance. In the rare event that a guest, host, or cleaner is injured or has their personal property damaged or stolen, Airbnb is responsible for paying out insurance claims.
  • Sales and marketing – such as customer acquisition, customer retention, discounts, promotions, referral fees, and refunds.
  • Research and development – there are also costs associated with ensuring the Airbnb platform is functional, on-trend, intuitive, and streamlined. Other research and development costs include engineering and product development.
  • General and administration – this includes costs related to administration and employees such as HR and finance, legal fees, executives, general managers, and professional services such as freelance photography.

Key takeaways:

  • The Cost Structure building block of the Business Model Canvas details the monetary cost of operating as a business. This block is important to get right since many businesses fail due to misunderstanding or underestimating their costs.
  • Cost-structures may be value-driven or cost-driven. As the name suggests, value-driven structures focus on delivering customer value at the expense of minimizing cost. In a cost-driven structure, the opposite is true.
  • Regardless of type, most cost-structure have one or more of the following attributes: economies of scale, economies of scope, fixed costs, and variable costs.

Alternatives to the Business Model Canvas

FourWeekMBA Squared Triangle Business Model

This framework has been thought for any type of business model, be it digital or not. It’s a framework to start mind mapping the key components of your business or how it might look as it grows. Here, as usual, what matters is not the framework itself (let’s prevent to fall trap of the Maslow’s Hammer), what matters is to have a framework that enables you to hold the key components of your business in your mind, and execute fast to prevent running the business on too many untested assumptions, especially about what customers really want. Any framework that helps us test fast, it’s welcomed in our business strategy.

fourweekmba-business-model-framework
An effective business model has to focus on two dimensions: the people dimension and the financial dimension. The people dimension will allow you to build a product or service that is 10X better than existing ones and a solid brand. The financial dimension will help you develop proper distribution channels by identifying the people that are willing to pay for your product or service and make it financially sustainable in the long run.

FourWeekMBA VTDF Framework For Tech Business Models

This framework is well suited for all these cases where technology plays a key role in enhancing the value proposition for the users and customers. In short, when the company you’re building, analyzing, or looking at is a tech or platform business model, the template below is perfect for the job.

business-model-template
A tech business model is made of four main components: value model (value propositions, mission, vision), technological model (R&D management), distribution model (sales and marketing organizational structure), and financial model (revenue modeling, cost structure, profitability and cash generation/management). Those elements coming together can serve as the basis to build a solid tech business model.
Business Model Template - FourWeekMBA

Download The VTDF Framework Template Here

FourWeekMBA VBDE Framework For Blockchain Business Models

This framework is well suited to analyze and understand blockchain-based business models. Here, the underlying blockchain protocol, and the token economics behind it play a key role in aligning incentives and also in creating disincentives for the community of developers, individual contributors, entrepreneurs, and investors that enable the whole business model. The blockchain-based model is similar to a platform-based business model, but with an important twist, decentralization should be the key element enabling both decision-making and how incentives are distributed across the network.

vbde-framework
A Blockchain Business Model according to the FourWeekMBA framework is made of four main components: Value Model (Core Philosophy, Core Values and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics/incentives through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.
VBDE Blockchain Business Model Template

Download The VBDE Framework Template Here

Main Free Guides:

Scroll to Top
FourWeekMBA
[class^="wpforms-"]
[class^="wpforms-"]