The decisions taken on a startup’s business model will determine what costs will it incur while creating, selling, and delivering its value proposition.
The cost structure block describes all the relevant costs a startup has, based on its business model design.
For example, deciding to do logistics in-house, instead of doing it through a third party, can make your logistics management cost to be significant for your startup.
WHY IS IT A FUNDAMENTAL QUESTION?
First, your startup’s cost structure reflects directly on two essential financial metrics: cash burn rate and cash runway. The more expensive your cost structure is the higher the cash burn rate and the lower the cash runway.
Second, a clear understanding of your startup’s cost structure brings you important conclusions about your business model viability. If your business requires high costs to run, but you can’t design equally high revenue streams, you’ll face problems in sustaining and scaling it.
Cost structure mapping helps you on visualizing significant costs and thinking about alternatives to reduce them. By reducing these costs you’ll raise the margins to reinvest in the business.
Finally, the relation of cost structure with other business model blocks shows you the impact that iterations or pivots have on your financial results. High iteration costs may end up harming your business.
FINDING THE ANSWER
As we’ve seen, your startup’s cost structure is a consequence of your decisions on other business model blocks.
Hence, start by visualizing your business model running. Map any significant costs coming from your key resources, key activities, key partners, channels, and customer relationships. For example, a significant channels cost as a result of the decision to hire account managers to serve your customers.
But why should I focus on the significant costs?
Because of the Pareto Principle! It states that about 80% of the impact is caused by approximately 20% of the factors. It means that about 20% of the items may cause you around 80% of your startup’s costs. So, keep in mind the most significant ones.
Finally, search for possible alternatives to reduce these costs. Keep running your startup as lean as you can.
- Visualize your business model running;
- Map the costs needed for executing Key Activities, Key Resources, Key Partnerships, Channels, and Customer Relationship.
- Identify the most significant costs;
- Think of possible alternatives to reduce relevant costs.
With your cost structure mapped, you now have completed the first version of your business model hypothesis.