How Inventors Build Successful Businesses: Cost Structure

Nothing in life is free. Sometimes it’s glaringly obvious. Like when we’re offered free samples at Costco, they’re banking on the fact that we’ll end up purchasing the product we just sample. Other times, it’s not so obvious. Like those free mobile games. The companies aren’t giving you free games out of the goodness of their hearts.

Did you know a common revenue stream for these companies is to collect your data and sell it to third-party companies that want to understand how to market to people better? As I said, there’s a cost to everything in life. When it comes to your own hardware product business, what is the cost structure for invention makers?

Cost Structure

The Cost Structure is the ninth and final part of this Business Model Canvas.

Let’s take a look back at the eight previous sections to see how we got here. It all starts by grouping your target customers into Customer Segments based on demographics and other factors. The reason why you want to group your customers is to be able to communicate the ideal Value Propositions for each segment. Because each segment has different characteristics, they may also prefer different communication Channels. Thus, invention makers should determine which channel, such as social media or email, is the most appropriate for each segment.

The more you communicate with your customers, the faster you’ll earn their trust, and the easier it is to build Customer Relationships with them. As you build these relationships, you’ll have to deliver on your value propositions. These are the Key Activities of your business. Keep in mind, however, chances are you’ll need help to fulfill your promises to your customers. That’s where the Key Partnerships and Key Resources come in.

In the end, your key activities, partnerships, and resources will come at a cost. In your Cost Structure, you’ll want to outline the most important costs to operate your business successfully. When you think about your cost structure, don’t just aim to break even. Obviously, you’ll need to do much more than that for your business to thrive. To put it into perspective, think about how a restaurant might price its menu. When you see, a steak that costs $100, the actual cost of the meat is probably a fraction of the menu price. Because a good restaurant owner needs to take into account labor, marketing, and other activities, partnerships, or resources to ensure the success of the restaurant.

Cost Structures & Types

Cost structures for invention makers are divided into two categories. Businesses may adopt a cost-driven structure to shed as much cost to the business as possible. In the SaaS world, you’ll often see early-stage startups give away their product for free to generate awareness but won’t offer any human customer service to cut costs. In place of humans, they may offer a chatbot or an FAQ to help answer questions about the product. On the other hand, value-driven structures focus on creating additional value for their customers. Think about the stark difference in quality, personal service, convenience, and comfort when comparing economy and first-class seating on an airplane.

As outlined by Alex Osterwalder, the creator of the BMC, inventors should also be aware of the different types of costs and how they can affect their bottom line.

• Scale: As your business scales, you may be able to enjoy wholesale or bulk pricing for things such as materials or manufacturing. Often, higher volume equates to lower prices per unit.
• Scope: This applies to businesses that offer more than one product. Marketing initiatives go a long way when you offer multiple products. Think about bank advertisements, when they offer a “welcome bonus” for opening up a chequing account, you might also be enticed to open a registered savings account, a credit card, or other products that they offer. 
• Fixed Cost: Costs such as labor or rent that change annually if at all. 
• Variable Cost: Raw material costs often fluctuate depending on demand or availability.