The Cost Structure is the last – but not least – component of a Business Model. It gathers the most important costs involved in the whole operation from the outset. This is the final block, precisely because we need to have all the previous components already defined so we can estimate the costs of each one. This is because creating a Value Proposition, maintaining a Customer Relationship, and developing Revenue Streams generates costs, just as the Key Resources, Activities and Partners demand their own expenses. Some Business Models, however, are much more cost driven than others. So let’s get to know the role and importance of the Cost Structure for your Business Model.
Cost-driven business models focus on minimizing any costs wherever possible. They seek, therefore, to create and maintain a cheaper structure, by means of Value Propositions of smaller prices, using processes of automation and outsourcing whenever possible. The goal is to have less expense to generate a more affordable final product. However, it’s worth remembering that a business should only reduce its own costs based on its internal expenses and never in response to what its competition is doing. Anyone who opts for price warfare may face ruin in the marketplace. This is because if the company is not able to manage costs by creating operational efficiency, the low price may become unsustainable. On the other hand, value-driven business models are less concerned with transaction costs and focus on the creation of Value Propositions. These value propositions usually have a high level of customization, developed according to the preferences of the clients. This is the case with luxury hotels, for example, that strive to create an experience for which customers are willing to pay dearly.
Cost structures can have the following characteristics:
When doing a complete analysis of your Business Model, the time will come when you need to establish your own Cost Structure, which matches satisfactorily with each of the previous blocks. To help you with this journey, you can ask yourself the following questions about your venture:
It is important to note that 90% of new businesses fail in the first three years of life because they have not been able to understand the costs required to develop their Value Propositions. However, when an entrepreneur is able to pinpoint their key resources, key activities and key partners, costs become easier to calculate. And finally, keep in mind that your cost structure should be re-evaluated from time to time, just as the other blocks. This will be the only way to ensure the long-term sustainability of your business.
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These pieces are great! I took considerable time to go through each of them and I can say it was worth my time. Thanks!
My pleasure, Etronam!