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The cost structure describes all the costs incurred in setting up and operating your business model. This is a topic you should work on very thoroughly because a) you often overlook essential aspects during the euphoric planning phase, and b) unexpected and escalating costs are among the most common reasons for the failure of self-employment. So, go ahead and work especially meticulously here!
Your task for today:
Ask yourself the following questions and write down the answers on Post-its:
- What are the most significant cost items in my business model?
- What are the most expensive things I need to buy for my business (e.g., equipment, machinery, software, hardware)?
- What are the most expensive services or activities I need (e.g., advertising, accounting, distribution, shipping)?
- Do I have to hire people and if so, how many and for which activities?
Cost structures are more critical for some business models than for others. We distinguish between cost- and quality-oriented business models.
Cost-oriented business models focus on minimizing costs wherever possible. This approach aims to create and maintain the leanest possible cost structure, for example, through a high degree of automation and extensive outsourcing. The customer should be convinced by a particularly favorable price (e.g., ALDI, RyanAir, BACKWERK).
Instead, quality-oriented business models focus on high quality and performance, even if this requires a higher price than other competitors. This is about premium products, personal service, boutiques, branded goods, etc. The customer should be convinced by an exceptional experience and have the feeling that they are buying something exclusive.
Both types of business model can be very successful, but only if they are fully focused on one of the two positions.
Second part of the task:
Think carefully about which segment you want to go into: As a cost leader with very lean processes and many customers with a smaller margin or a quality leader with an exquisite range of products with fewer but more solvent customers, allowing for a higher margin. Complete the Post-its in the Extended Canvas in the fields “Unique value proposition” (e.g.,”at the lowest price” or “highest quality”), “solution” as well as with your “target group” (e.g., “cost-conscious” or “demanding”), if this aspect has not yet been considered.
It’s also important to distinguish between fixed and variable costs:
Fixed costs are incurred regardless of the volume of goods or services you produce. Examples are salaries, rents, and production facilities. Some companies, such as production companies, are characterized by a high proportion of fixed costs. For example, in the case of yoga studios, these include the premises, equipment, insurance, and advertising costs, regardless of how many people actually come to the yoga studio.
Variable costs are proportional to the volume of goods or services produced. In the case of a yoga studio, for example, only a few costs are variable, such as the consumables, such as tea, toilet paper, possibly the yoga teachers if they are only paid on demand, etc.
Fixed costs can also be converted into variable costs (and vice versa). For example, the yoga room could only be rented by the hour if enough participants have registered. This can be especially helpful in the initial phase when there are not many customers, and costs can be saved until the classes are regularly full enough.
Third part of the task:
Look at the cost Post-its worked out so far and sort them according to variable and fixed cost items for your business idea and mark that on the Post-it.
Then estimate or research the costs for each item on the Internet (fixed, per month, per year, or per customer) and write them on the corresponding Post-its. Now glue them in two columns for fixed and variable costs and descending by amount.