Cost Structure defines all the costs and expenses that your company will incur while operating your business model. This final step in the process is important, because it will help your team decide whether to pivot or proceed.
There are two main categories of cost structure: value-driven and cost-driven. The focus of value-driven cost structures is to create more value in the product itself, not necessarily producing the product at the lowest possible cost. Examples of this would be Prada, Rolex, or Ritz-Carlton. On the other hand, cost-driven cost structures focus on minimizing the costs of the product or service as much as possible. Examples would be Walmart and Southwest Airlines.
In order to populate the cost structure block of your business model canvas, your team must consider the most important costs to your business and create hypotheses for these expenses. You will need to take into account both fixed costs, such as startup and acquisition costs, and variable costs, such as your monthly operating costs. After you gather data using resources available (see “Library Resources” in Helpful Resources) in order to prove your hypotheses, you will be able to determine if you should pivot or proceed. To proceed, your costs will have to be less than your revenue, which you determined in the Revenue Streams block of the canvas. If this is not the case, you will have to pivot and make adjustments.
The DoughJoe- We were blessed with two accountants in our team. If I have to make one recommendation, it’s get yourself an accountant. In this phase we wanted to focus on the possibility of alternatives: make vs. buy, lease vs. own, equipment possibilities, etc. One unique aspect of cost structure is that it is singularly annoying – finding industry averages is just the beginning. This is the part of the BMC where you’ll source most of your Key Resources through negotiation or tireless effort, only to find that the cost to lease a building that’s been the backbone for your business idea can’t be sustained by your revenue streams, and you’ll have to nearly start from scratch. On the bright side, there are almost always cheaper or more effective alternatives, so keep diggin’!
Crepe Expectations- In order to gain an understanding of what our cost structure should be, we created an expense model. We formed a spreadsheet consisting of estimates for all the costs we would reasonably expect to incur, both startup and recurring costs.
|Food Truck Expense Report|
|Truck (including redesign and equipment)||$||60,000-70,000|
|Initial Food Purchases||1,000|
|Permits and Licenses||500+|
|Legal/Consulting Fees (including setup costs)||1,000|
|(Could be around $100 if use existing iPad)|
|Approx. Total Startup Costs||$||65,500 – 77, 750|
|Monthly Recurring Costs:|
|Food/Supplies Restock (~75/100 crepes/day)||$||1,000-1,500|
|Permit Renewal ($250/yr)||20|
|Payroll (including payroll taxes)||6400|
|Storage/Commercial Kitchen Rent||800|
|Administration/General/Misc Expenses (Budget 5% of Revenue)||1000|
|Budget for Unexpected Repairs/Maintenance||1000|
|Approx. Monthly Recurring Costs||10,695 – 11,395|
|Time Cost: 2-6 months|
***After examining our spreadsheet and taking into consideration our financial resources (see Key Resources), we decided we could proceed with our business model since our estimated costs would be less than our estimated revenues.
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