The cost structure is one of the building blocks of a business model. It represents how companies spend most of their resources to keep generating demand for their products and services. The cost structure together with revenue streams, help assess the operational scalability of an organization.
|Concept||Cost Structure is a fundamental concept in business and economics that refers to the composition of costs within an organization. It involves categorizing and analyzing the various expenses incurred in the production of goods or services. Understanding cost structure is crucial for decision-making, pricing strategies, financial planning, and profitability analysis. It helps businesses determine where their resources are allocated and how efficiently they are used.|
|Key Components||The cost structure typically includes the following components: |
– Fixed Costs: These are expenses that remain constant regardless of the level of production or sales. Examples include rent, salaries of permanent staff, and insurance premiums.
– Variable Costs: Variable costs vary in direct proportion to the level of production or sales. Common examples are raw materials, direct labor, and sales commissions.
– Semi-Variable Costs: Semi-variable costs have both fixed and variable components. For instance, utility bills may have a fixed service fee and a variable usage fee.
– Operating Costs: Operating costs encompass all expenses related to day-to-day operations, including both fixed and variable costs. They are essential for keeping the business running smoothly.
– Cost of Goods Sold (COGS): COGS includes expenses directly tied to the production of goods or services. It often includes raw materials, labor, and manufacturing overhead.
– Total Costs: Total costs are the sum of fixed, variable, and semi-variable costs. They represent the overall expenditure of a business.
|Application||Analyzing cost structure is vital for multiple business aspects: |
– Pricing Strategy: Understanding cost components helps in setting competitive prices that cover expenses while generating profits.
– Cost Control: Identifying areas of high or unnecessary costs allows businesses to implement cost-cutting measures effectively.
– Financial Planning: Cost structure data is essential for creating budgets, financial forecasts, and business plans.
– Profitability Analysis: Businesses use cost structure to assess the profitability of products, services, or business segments.
– Decision-Making: It aids in making informed decisions, such as expanding production, outsourcing, or investing in cost-effective technologies.
|Benefits||A clear understanding of cost structure provides several benefits: |
– Profitability Optimization: It helps in optimizing pricing and cost management strategies to maximize profits.
– Resource Allocation: Businesses can allocate resources efficiently to areas with the most significant impact on their bottom line.
– Risk Management: Knowing the cost structure helps identify potential financial risks and uncertainties.
– Competitive Advantage: Effective cost control can lead to a competitive advantage by offering products or services at lower prices or with higher quality.
|Challenges||Challenges associated with cost structure analysis include: |
– Complexity: In some industries, cost structures can be intricate, making it challenging to allocate costs accurately.
– Variable Cost Fluctuations: Fluctuations in variable costs due to market changes or supply chain disruptions can pose challenges in cost management.
– Overheads: Managing fixed costs can be challenging if a business faces declining revenue or significant disruptions.
|Real-World Application||In manufacturing, analyzing the cost structure helps determine the cost of producing each unit and the breakeven point for a product. – Service industries use cost structure analysis to allocate labor costs, overheads, and other expenses to various service offerings. – Startups and small businesses often focus on minimizing fixed costs to maintain flexibility and adaptability in the early stages.|
Why it’s important to know how companies spend money
There are two elements to understand about any company:
- How it makes money.
- How it spends money.
While most people focus on how companies make money. A few truly grasp how those same companies spend money.
However, understanding how companies spend money can give you insights into the economics of their business model.
Thus, once you grasp those two – seemingly simple – elements you’ll understand a good part of the logic behind the company’s current strategy.
Defining and breaking down the cost structure
In the business model canvas by Alexander Osterwalder, a cost structure is defined as:
What are the most cost in your business? Which key resources/ activities are most expensive?
In other words, the cost structure comprises the key resources a company has to spend to keep generating revenues.
While in accounting terms, the primary costs associated with generating revenues are called COGS (or cost of goods sold).
In business modeling, we want to have a wider view.
In short, all the primary costs that make a business model viable over time are good candidates for that.
Therefore, there is not a single answer.
For instance, if we look at a company like Google, the cost structure will be primarily comprised of traffic acquisition costs, data center costs, R&D costs, and sales and marketing costs.
Why? Because all those costs help Google’s business model keep its competitiveness.
However, if we had to focus on the main cost to keep Google making money we would primarily look at its traffic acquisition costs (you’ll see the example below).
This ingredient is critical as – especially in the tech industry – many people focus too much on the revenue growth of the business.
But they lose sight of the costs involved to run the company and the “price of growth.”
Defined as the money burned to accelerate the rate of growth of a startup.
Too often startups burn all their resources because they’re not able to create a balanced business model, where the cost structure can sustain and generate enough revenues to cover the major expenses and also leave ample profit margins.
Companies like Google have been pretty successful in building up a sustainable business model thanks to their efficient cost structure.
Indeed, from a sustainable cost structure can be built a scalable business model.
In the Blitzscaling business model canvas, to determine operational scalability, Reid Hoffman asks:
Are your operations sustainable at meeting the demand for your product/service? Are you revenues growing faster than your expenses?
Blitzscaling is a particular process of massive growth under uncertainty that prioritizes speed over efficiency and focuses on market domination to create a first-scaler advantage in a scenario of high uncertainty.
Reid Hoffman uses the term operational scalability as the ability of a company at generating sustainable demand for its products and services while being profitable.
While most startups’ dream is to grow at staggering rates. Growth isn’t easy to manage either.
As if you grow at a fast rate, but you also burn cash at a more rapid rate, chances are your company or startup might be in jeopardy.
That is why a business model that doesn’t make sense from the operational standpoint is doomed to collapse over time!
Cost structure and unit economics
A cost structure is an important component of any business model, as it helps to assess its sustainability over time.
While a startup’s business models, trying to define a new space might not be able to be profitable right away, it’s important to build long-term unit economics.
Google cost structure case study
I know you might think Google is too big of a target to learn any lessons from it.
However, the reason I’m picking Google is that the company (besides its first 2-3 years of operations) was incredibly profitable.
TAC stands for traffic acquisition costs, and that is a crucial component to balance Google’s business model sustainability.
More precisely the TAC rate tells us the percentage of how Google spends money to acquire traffic, which gets monetized on its search results pages.
For instance, in 2017 Google recorded a TAC rate on Network Members of 71.9% while the Google Properties TAX Rate was 11.6%.
Over the years, Google managed to keep its cost structure extremely efficient, and that is why Google has managed to scale up!
Part of Google’s cost structure is useful for keeping together the set of processes that help the company generate revenues on its search results pages, comprising:
- Server infrastructure: back in the late 1990s when Google was still in the very initial stage at Stanford, it brought down its internet connection several times, causing several outages. That allowed its founders to understand they needed to build up a robust infrastructure on top of their search tool. Today Google has a massive IT infrastructure made of various data centers around the world.
- Another element to allow Google to stay on top of its game is to keep innovating in the search industry. Maintaining, updating, and innovating Google‘s algorithms isn’t inexpensive. Indeed, in 2021 Google spent billions on R&D.
- The third element is the acquisition of continuous streams of traffic that make Google able to create virtuous cycles and scale up.
How do we judge the ability of Google’s advertising machine?
I envisioned a metric called traffic monetization multiple, which is the ability of the company to monetize its traffic:
As you can notice from the above, this is a purely financial metric, which needs to be balanced out with a qualitative analysis of why the metric increased in the first place.
Indeed, it’s critical to keep into account these questions:
- Has monetization increased thanks to an improved UX? Or is monetization worsening the UX?
- Has monetization improved thanks to an increased customer base? Or has it increased due to higher prices per ad?
- Lastly, how is monetization balanced with legal risks posed by increased tracking?
All these questions are critical to answer, because, financially Google’s advertising machine seems as strong as ever.
There are hidden risks underlying it, which might, all of a sudden threaten its overall business model.
- On a positive note, Google has managed to further scale, as a consequence of the pandemic. Thus, bringing its products to hundreds of millions of new users. Yet. this further scale (especially on mobile devices) has created new challenges for the company. Which is finding it harder and harder to properly index a web made of billions and billions of pages, and growing. This poses a threat in the long term, as it might reduce the quality of organic search results.
- To monetize this expanded user base, Google is serving more ads. This might work in the short term to squeeze the advertising machine. But it might make the overall experience bad in the long term. So it’s critical to balance these things out.
- To further expand its revenues, the company has also increased the price per ad. While, in the short-term, the strategy works, in the long-term, this might substantially reduce the customer base.
The points above, are some of the things you want to look at, qualitatively, to really understand what’s going on, with the changing cost structure of the company.
Netflix cost structure case study
When we look at the overall Netflix business model it’s important to understand a couple of things in order to frame its cost structure:
- The Netflix revenue model.
- And the Netflix capital expenditure.
Netflix runs an on-demand streaming platform, on top of a subscription service.
Members pay a fixed subscription monthly or yearly price, in exchange for having access to a library of content that continuously updates.
If Netflix revenues are higher than the cost that it takes to run the platform, then the platform is profitable.
Is Netflix profitable? It is indeed. However, to understand its cost structure we need to have a deeper look at Netflix’s capital expenditure.
In short, in order for Netflix to keep generating revenues in the long-term, it needs to have a library of content that is guaranteed in the coming 5-10 years.
How can the company do that?
It can do that by either licensing or producing content.
Those mechanisms have two different dynamics.
In fact, for most of its life, Netflix has been spending a massive amount of resources to license content and make it available on its platform.
This is the epitome of a platform business model.
Thus, Netflix invested capital to guarantee a continuous flow of content on top of its platform.
This advanced capital would be repaid back, with revenues coming from memberships.
This also means that for most of its history Netflix run at a negative cash flow cost structure.
Meaning that Netflix had to advance the money needed to license the content.
This money would be recouped many times over, in the long run, as the platform kept growing its members’ base.
On the other hand, starting in 2013, Netflix started to invest more and more into produced content.
What we know today as “Netflix Originals” or a library of content exclusive to paying members.
This sort of investment, while similarly, to licensing content, makes Netflix advance the costs of content, which would be recouped over the years.
It also gives the company the ability to freely distribute this content and dispose of this content over the years.
In conclusion, even though the content production investment doesn’t change the Netflix cost structure in the short term, it will change it in the long run.
Thus, we might expect Netflix to move from a cash flow negative cost structure, to a cash flow positive cost structure as it moves from the platform (investing primarily in licensed content) to a media powerhouse (as investments in produced content pass those in licensed content).
Thus, what I like to call “the mediafication” of Netflix, will be a key component of its business model advantage, in the long term.
How do we assess the evolution in this process?
This process of “mediafication” started in 2013. And while today, 66% of the content investments on Netflix are still about licensed content, the company is ramping up its investments in owned content, further.
From a formal standpoint, when new content investments in produced content will pass the license ones, we can officially call Netflix a Media Powerhouse!
And for now, it’s critical for the company to keep “arbitrating content:”
Amazon cost structure case study
When we look at the overall Amazon business model it’s important to understand a couple of things in order to frame its cost structure:
- The Amazon revenue model.
- And Amazon’s capital expenditure.
When it comes to Amazon, in particular, understanding its cost structure is a bit trickier, as the company runs a business model with many moving parts, business units, and cost structures.
In fact, it’s important to look at Amazon’s business model, according to two perspectives:
- Amazon e-commerce platform (everything that runs on top and adjacent to Amazon e-commerce).
- And Amazon Enterprise/B2B platform (Amazon AWS).
When it comes to the Amazon e-commerce platform, its primary mission is to enable variety, low costs, and a great customer experience.
Thus, Amazon runs it (as a choice) with very tight profit margins. However, this doesn’t give us a complete picture of its e-commerce cost structure.
Indeed, while the Amazon e-commerce platform has tight profit margins, it still runs with a widely positive cash flow structure.
How? Through its cash conversion cycle:
In short, Amazon is able to turn its inventories very quickly, get paid quickly by customers, and pay back suppliers with a wider term, thus enabling the company to generate wide cash margins, in the short-term, invested back into the business.
When instead, we look at Amazon’s Enterprise/B2B platform, Amazon AWS, we need to frame this in a different light:
You can see how over the years Amazon AWS profitability has been running at wide margins. As the infrastructure costs are well paid for, from its revenues.
This is true also today (2021), where Amazon AWS contributed to 55.5% of the overall Amazon operating margins.
This means, that if you were to spin off Amazon AWS from Amazon’s operations, you would get a much lower operating profit figure.
Amazon AWS, while also requiring substantial technological investments, for now, it enjoys market dominance (In 2021 Amazon AWS had revenues of over $62 billion, whereas Microsoft Intelligent Cloud, for over $60 billion, and Google Cloud, for over $19 billion) and wide margins, which might last over the next 5 years, as more startups move to AI, as a core paradigm of software companies (Amazon AWS is becoming the leading infrastructure powering up the AI and software industry).
Spotify’s cost structure analysis case study
When we look at Spotify’s cost structure, it’s important to emphasize the difference between the two main revenue streams:
- Ad-supported: free users can get unlimited music for free, but they have limited options and features. For instance, before they can skip listening to new songs or podcasts they will have to listen to the advertising. Thus advertising amortized the cost of Spotify to run the platform for free users.
- Premium: free users are channeled through a self-serving funnel that prompts them to subscribe to the paid service. Thus, enabling Spotify to monetize at wide margins the free platform, once free users become paid subscribers.
When it comes to cost structure, therefore, it’s worth noticing:
- The ad-supported business runs at tight margins, and its cost gets amortized with advertising. However, the free platform is used as a self-serving funnel to prompt free users to become paid members. In fact, chances are – if you are a paid member – you were a free user before. In short, being a free user widely increases the chances of becoming a paid member.
- The premium business, while it has a lower subscriber count, it has much wider margins. Thus, the premium platform widely pays off for the free platform.
In other words, in this specific case, the cost structure analysis helps us frame the importance of the free platform.
As if we were to analyze that from the perspective of revenues along, the free platform would not be justified.
In fact, the free platform has tight margins, and it generates costs the more it widens up.
In fact, the more free users on the platform, the more royalties Spotify has to pay back to creators for the streamed content.
The free users’ platform is critical to enhancing Spotify’s sales model, thus increasing the chances of free users becoming paid members.
And it plays a key role to enhance the brand and visibility of Spotify, as a consumer platform.
In short, chances are that if to become a premium member, you were a free member first.
Therefore, on the one hand, the ad-supported business is key to amplifying the brand of the company.
On the other hand, the ad-supported business is critical to funneling free users into premium members.
That is why, it’s important to perform bot a revenue model analysis, combined with a cost structure analysis.
To understand the reasons for running certain business segments, that go beyond revenues alone.
Apple: how much does an iPhone cost?
Another incredible example, of how a cost structure changes according to a business model, it’s Apple.
Apple has been among the few companies that managed to build one of the most incredible business platforms of the last fifteen years.
Indeed, we can argue, that Apple is the major business platform of the last fifteen years (since on Stage, in 2008, Steve Jobs announced the App Store, after having announced it almost a year before the iPhone).
Of course, when it comes to Apple we can easily argue that its business model depends too much on its iPhone sales and that the company managed to keep its manufacturing costs for the iPhone, by outsourcing most of the manufacture in China, while keeping the design in-house.
And those are all true facts.
Yet, Apple is the only company that managed to build such a massive business, at scale, on a device, which turned into a platform.
This completely affected the company’s cost structure.
First, let me explain what’s the difference between a product and a platform.
A product is simply a physical/digital thing that can be exchanged from the company to the customer.
A platform, instead, is something that goes beyond the physical/digital product itself, and it gains value based on the utility that can grow exponentially, of the underlying product.
This utility comes from the fact, that other people (developers, and entrepreneurs) can extend and expand the capability of the product to design features and a whole set of applications that final users find compelling.
When the iPhone transformed from a product (in 2007) to a platform (in 2008), that was the turning point.
You no longer get a commodifiable good, which over time would depreciate.
In other words, other players had to gain market shares by decreasing the price of their products.
Apple could keep growing by increasing the price of the iPhone, as its utility (thanks to the App Store) grew.
This deeply affected Apple’s cost structure.
Where the company managed to keep its cost of making the iPhone low, while keep increasing its prices, as utility grew.
In addition to that, Apple successfully built a service business, on top of the iPhone, thanks to its market strength.
The service business further expanded on top of the iPhone dominance and it’s now become among the most important revenue streams for Apple.
For that, it’s critical to look at the evolution of Apple’s business model.
Today the App Store represents a 30% tax on the mobile web, which Apple is able to keep cashing out on, thanks to the success of hardware + software (Operating System) + Marketplace (App Store) what today we know as a Business Platform!
You need to understand two key elements to have insights into how companies “think” in the current moment.
The first is how they make money.
The second is how they spend money.
When you combine those two elements, you can understand the following:
- How a company really makes money (where is the cash cow, and how and if a company lowers its margins to generate more cash flow for growth).
- Whether that company is operationally scalable.
- Where the company is headed in the next future and whether it will make sense for it to invest in certain areas rather than others!
In this article, we focused on operational scalability and cost structure, and we saw how Google managed to build an extremely efficient cost structure.
Additional Cost structure examples
Here are some more cost structure examples from a few well-known companies.
According to Statista, Walmart has a total of almost 11,000 stores around the world with a sophisticated and optimized supply chain.
The company benefits from a cost-driven structure characterized by economies of scale and scope, but it nevertheless must meet numerous expenses.
One of the main costs Walmart must absorb is labor. This is no surprise since the company at one point was the third largest employer in the world after the United States and Chinese armed forces.
Employee wages are the main component of the labor costs, but the company’s strong anti-union stance means it is frequently embroiled in various legal disputes over worker rights.
The company also spent $107.1 billion on selling, general, and administrative expenses in 2019 (around 20.5% of total revenue).
Cost of sales for the same period was $385.3 billion, which includes the cost of product transportation, warehousing, and import distribution.
As a premium manufacturer of sports cars, Ferrari utilizes a value-driven cost structure.
While it is difficult to compare exact data, manufacturing relatively bespoke vehicles by hand is more expensive than churning out thousands of the same model on a production line.
Nevertheless, estimates suggest Ferrari only makes about $6,000 in profit for each car that sells for an average price of $200,000.
Ferrari’s main costs are incurred from:
- Raw materials and parts.
- Research and development – this was the company’s most significant expense in 2016 because of expenses associated with its Formula 1 racing team.
- Labor – relatively high compared to less prestigious car brands.
- Sales tax.
- Advertising, and
- Other – which includes depreciation, overheads, markups, logistics, etc.
Wizz-Air is a Hungarian ultra-low-cost airline carrier that unsurprisingly employs a cost-driven structure to provide the most value to travelers.
Like Walmart, Wizz Air can undercut the vast majority of competition by using economies of scale.
In 2020, for example, it was offering two-hour flights for as little as $21 each way.
Wizz Air can offer these extremely low ticket prices because it chooses to collect a smaller profit from more passengers rather than earning a larger profit on fewer passengers.
This means populating each of the company’s Airbus A320s with as many seats as possible and removing business class altogether.
The aircraft themselves are also turned around as quickly as possible to ensure they spend the maximum amount of time in the air.
The company also minimizes costs with the following initiatives:
- A fleet comprised of one type of aircraft. With staff only required to be trained on one model, costs are reduced.
- Continuous leasing. This means Wizz Air has access to only the most reliable and fuel-efficient models.
- Undesirable flight times. Many of Wizz Air’s flights take off early in the morning or very late at night.
- Basic airport services. Scheduled services also operate in satellite or budget terminals that do not contain lounges or other creature comforts.
- Cost Structure Overview: The cost structure of a business is a crucial aspect that defines how the company allocates resources to produce and deliver its products or services. It includes both fixed and variable costs that impact the company’s profitability.
- Revenue and Cost Relationship: Understanding how a company makes money (revenue generation) and how it spends money (cost structure) is essential for assessing its financial health and sustainability. The balance between revenue and expenses is a key determinant of profitability.
- Business Model Canvas: The Business Model Canvas, created by Alexander Osterwalder, is a popular tool used to visualize and analyze a company’s business model. It breaks down various components, including cost structure, to provide a holistic view of the business.
- Primary Cost Components: Cost structure comprises several primary cost components, such as labor, materials, overhead, marketing, research and development (R&D), and administrative expenses. These costs can vary significantly across industries and business models.
- Cost of Goods Sold (COGS): COGS represents the direct costs associated with producing or delivering a company’s products or services. It’s a critical cost component in many businesses, particularly in manufacturing and retail.
- Operational Scalability: Operational scalability is the ability of a company to handle increased demand for its offerings without incurring proportionately higher costs. Achieving operational scalability is vital for sustainable growth.
- Balancing Growth and Costs: While rapid growth is a goal for many startups, it’s important to balance growth with cost management. Uncontrolled growth can lead to financial challenges if expenses outpace revenue.
- Unit Economics: Analyzing unit economics involves examining the profitability of each unit (product or service) a company sells. Positive unit economics indicate that a company can generate profits at the unit level, contributing to overall profitability.
- Case Studies: Real-world examples of companies like Google, Netflix, Amazon, Spotify, and Apple are used to illustrate how their unique cost structures have played a critical role in shaping their business models and success.
- Platform Business Models: Some companies, like Apple, have transitioned from traditional product-centric models to platform-centric models. These platforms create ecosystems that drive additional revenue streams, such as app stores and services.
- Long-Term Strategy: Building a sustainable cost structure is essential for long-term success. Companies must ensure that their cost-to-revenue ratios allow for consistent profitability and adapt to changes in the business landscape.
- Market Dominance: Achieving dominance in a specific market, as seen with Amazon Web Services (AWS), can lead to wide profit margins and strong financial performance. Companies that can leverage their market position effectively can enjoy sustainable success.
- Industry-Specific Cost Factors: Different industries and sectors have unique cost factors that impact their cost structures. For instance, airlines like Wizz Air focus on cost optimization to offer low-cost flights to customers.
- Value-Driven and Cost-Driven Models: Businesses can adopt either a value-driven or cost-driven cost structure. Value-driven models emphasize delivering premium products or services, while cost-driven models focus on cost efficiency and affordability.
- Continuous Analysis: Companies should regularly assess their cost structures and adjust them as needed to remain competitive and adapt to changing market conditions.
- Importance of Free Services: Free or freemium services, like Spotify’s ad-supported platform, can serve as acquisition funnels to convert free users into paying customers. These free offerings have costs but contribute to overall revenue.
- Financial Metrics: Key financial metrics like gross margin, net profit margin, and return on investment (ROI) are essential for evaluating the effectiveness of a company’s cost structure.
- Strategic Decision-Making: Cost structure analysis informs strategic decisions, including resource allocation, pricing strategies, and investments in innovation and growth.
- Marketplace and Ecosystems: Building marketplaces and ecosystems, as seen with Apple’s App Store, can create additional revenue streams beyond core product sales.
- Customer Acquisition Costs: Understanding the cost of acquiring new customers is vital for assessing the efficiency of marketing and sales efforts.
|Fixed Cost Structure||In a fixed cost structure, a significant portion of a business’s costs remains constant regardless of production or sales volume.||– Predictable and stable expenses. – High initial investment in assets. – Economies of scale can lower fixed costs per unit.||Example: A manufacturing facility has substantial rent and depreciation costs, which do not change significantly whether it produces 1,000 or 10,000 units of a product.|
|Variable Cost Structure||Variable cost structures entail costs that vary in direct proportion to production or sales volume.||– Costs directly tied to output. – Lower initial capital requirements. – Scalability and flexibility in cost management.||Example: A bakery’s primary variable cost is the cost of raw ingredients like flour, sugar, and eggs, which increase as it produces more cakes and pastries.|
|Mixed Cost Structure||In a mixed cost structure, businesses have both fixed and variable costs, resulting in a combination of cost elements.||– Combines stability with scalability. – Challenges in cost analysis and decision-making. – Managing the balance between fixed and variable costs.||Example: A call center incurs fixed costs like rent and salaries for supervisors (fixed) but also variable costs tied to call volume, such as agent wages and telecommunication expenses (variable).|
|Step Cost Structure||Step cost structures feature costs that remain constant within certain production or activity levels but increase abruptly at specific production thresholds.||– Cost jumps occur at specific production or activity levels. – Requires careful planning to optimize production within each cost bracket. – Cost predictability within the predefined range.||Example: A shipping company may need to lease additional trucks and hire more drivers once its shipping volume exceeds a certain threshold, resulting in step increases in costs.|
|Semi-Variable Structure||Semi-variable cost structures comprise both fixed and variable elements, but the fixed and variable portions do not vary in direct proportion.||– Complex cost behavior. – Challenges in cost allocation and budgeting. – Necessitates detailed analysis to differentiate fixed and variable components.||Example: An internet service provider has a base subscription fee (fixed) but also charges for data usage (variable), where additional data usage may not lead to a linear increase in costs.|
Alternatives to the Business Model Canvas
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.
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.
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.
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.
FourWeekMBA Business Toolbox
- Successful Types of Business Models You Need to Know
- Business Strategy: Definition, Examples, And Case Studies
- What Is a Business Model Canvas? Business Model Canvas Explained
- Blitzscaling Business Model Innovation Canvas In A Nutshell
- What Is a Value Proposition? Value Proposition Canvas Explained
- What Is a Lean Startup Canvas? Lean Startup Canvas Explained
- What Is Market Segmentation? the Ultimate Guide to Market Segmentation
- Marketing Strategy: Definition, Types, And Examples
- What Is Product-Market Fit? Product-Market Fit In A Nutshell