Cost Structure

Lesson Details:

Video Transcription: In this video we're gonna talk about the cost structure section of your business model canvas and it completes the left side of the canvas and it takes into account all the key activities and resources so that once you understood and document that hey what is truly important for my business you can start to examine does it fit with the cost structure so you'll have a complete picture and most importantly what is a good takeaway here is that it should all work together and you've seen this theme repeat is that a plan for one part of your business it's fine but it must work together with other parts of your business that's the key of modeling every piece in almost anything you build whether it's buildings or cars a piece by itself sure it it's fine but it must work well together with the other pieces that's designing that's modeling and that's gonna be the important part here with the cost structure so you must identify with your key resources and things like that what are your biggest cost are they fixed costs like employee salary or variable cost the fixed costs are obviously easy to account for and predict and the variable cost they're hard to predict and one very important thing to think through is your business a cost driven business or a value driven business I'll give you examples so a cause different business is a very good example of that is the service industry whether you're doing marketing services or cleaning service as well you have a cost of producing that service it's a certain amount of hours by either you or by your employee and if it takes longer and you price the service at a certain rate.

So if you take longer to do the service your profits erode and if you take extra long time your profits turn into losses because you have to pay your employees or you personally spend too much time so that's the service business and what you have to do in a service business is to minimize your costs maybe train your employees better so they do more work and less time right away that's an increase in profit so that's the service industries it's a very common example of a driven business because you must minimize your cost the value driven business is more like an innovative business or a high-end service where let's say you're an innovative startup well you've got to spend a lot of money on research and development on experimentation upfront so that you can innovate or that you can create best-in-class product then you win with the value that you end up with so that's the difference now I'll go over what your common biggest costs will be so you can know what to expect typical large costs are employee salaries which include legal cost legal costs can be variable cost but employee salaries are obviously set for the most part and especially if you have a brick and mortar business you cannot escape employee salaries almost and of course if you're an innovative company research and development opportunity expansion marketing those are all large costs you have a brick and mortar company again rent furniture remodeling utilities also inventory or supplies can be a large cost for you and want to bring your attention to some things that might not feel like there might be large costs but in fact they are and these are things you don't assume.

You'll have but many people end up having which is inefficiencies in your business processes like hiring the wrong people training them incorrectly doing certain things in a not in an optimal way or pursuit of wrong strategies let's say for example your best marketing strategy is to pursue SEO and that would be your winning strategy but you pursue Instagram instead I don't know if it's right if it's wrong for different businesses different things all right but this is an example well if you pursue Instagram for three months and then you realize oh that wasn't optimal for me then guess what that was a tremendous cost for you cost not only in time and effort but also in the missed faience okay you could have had more clients if you chose the right path and the same is for any business strategy if you choose the wrong path there will be a cost of missed opportunity and time and the actual resources it took to implement that strategy so sometimes heading in the wrong direction can be one of the most costly things so that's something to consider as well and when you're planning the left side of the business model canvas take a look at what are the important activities for you and what are the biggest cost and then you can kind of match them up and see hey is it possible to remove one of the big costs and maybe switch up one of the important activities so that it's not there or it's cheaper and that way you start to model things if you're doing your little piece of paper and it's easy to see it's visualized and it's easy to take out or adopt or change the key activities to be a little less expensive and so everything is a little more efficient so that's the value of the right business model planning.