Important Cost Structures

Business Model Innovation

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Course Modules

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Module 1	Business Model Innovation
Unit 1	Business Model Innovation Pretest
Unit 2	Define your Customer Segments
Unit 3	Define your Value Proposition
Unit 4	Channel Strategies
Unit 5	Customer Relationship Types
Unit 6	Key Revenue Streams
Unit 7	Key Resource Types
Unit 8	Key Activities your Business Engages in
Unit 9	Key Partnerships
Unit 10	Important Cost Structures
Unit 11	Business Model Innovation Posttest

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Unit Video

Unit Summary

The two essential cost structure elements:

Fixed costs
Variable costs

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Transcript

In this video, you will learn the 2 most important cost structures in your business.

Cost structure refers to all the costs that you incur to deliver on your business model. Keeping your costs under control is essential to maintain a healthy business.

2 Essential Cost Structure elements include:

Fixed Costs – which refer to all costs that you need to incur whether you sell or not. These could include factory, general administration staff, rent, management staff costs etc..
Variable Costs – which refer to costs that are associated with the sales of your products or services. The more you sell the more these costs would go up. Variable costs include things like the raw material for your products, or cost of consultants that you would etc..

When you are starting up a business keeping the fixed costs as low as possible is essential so that you don’t run out of cash too quickly before you start selling enough products and services to cover your costs.

Case Study

Julie knows that she needs to keep the cost of operation as low as possible so that she doesn't increase the running costs which are the bulk of her costs. She calculates that her monthly running costs are about $10,000 in salaries - including hers and her 2 colleagues - $5,000 in marketing and related expenses. The cost per student for the hosting and infrastructure for her app are $50 per month. So her profit per student is $1.5 and as such, she calculates that she can break even once she has 10,000 students per month on the application.

Quotes

Cutting prices or putting things on sale is not sustainable business strategy. The other side of it is that you can’t cut enough costs to save your way to prosperity. Howard Schultz