Your cost structure as it relates to the Business Model Canvas is closely
related to your value proposition. A
company’s cost structures represents the specific costs that the business will
incur while operating under a particular business model to create and deliver
the business’s value proposition, as well as maintaining its customer
relationships all have costs to the business. These costs have to be allocated
across all product or service offerings to minimize costs.

A company’s cost structures can be calculated after it considers the key resources, key activities and key partners it will require. For a vertically
integrated business, such as one of the big six Japanese Keiretsus who are able
to allocate their fixed costs from one business unit to another business unit,
these businesses control all the key resources, activities, and its partner
business units to pick which industry it wants to dominate. For the small
business owner however, the best option when it comes to understanding cost
structures is to look at the contact area between the company and its
customers, buyers, and suppliers using Porter’s Five Forces model.

At its highest level, cost structures are either cost-driven or
value-driven.

Cost-driven structures

Cost-driven structures are focused on keeping costs or expenses down.

Companies that embrace a cost-driven structure use automation or outsourcing
to keep internal costs low, resulting in competitive pricing. Operational excellence is often at the core of
the business model of cost-driven structures and are exemplified by Walmart and
McDonald’s.  Since margins are small, a
business that is cost-driven has to rely on economies of scale and scope to
achieve satisfactory returns.

Economies of scale represent cost-saving that a business enjoys as it grows. For example, a larger company like Walmart benefits from volume discounts on the items it purchases, resulting in lower costs per unit.

Economies of scope represent cost savings that a business enjoys as the scope of its operation grows. For example, a large online retailer like Amazon used its market leadership in online book delivery to expand into other consumables.

Value-driven structures

Value-driven structures are focused on providing more value or revenue
through premium offerings or services.

Companies that embrace a value-driven structure use customer intimacy and
high-end components to create premium products. Customers that buy value-driven
products and services are less price-conscious, and value quality, performance,
and convenience over price. Nordstrom and Rolex are examples of companies that
have value-driven structures.

Operating Leverage

Another element of a company’s cost structure is the ratio of fixed to
variable costs they have and are known as