Cost Structure and Revenue Streams

The final post on the Business Model Canvas is going to be about money, more specifically your cost structures and your revenue streams.

  • Cost structure – what are the most important costs associated with your product or service?
  • Revenue streams – how much, and through which methods, are people willing to pay for your product or service?

When defining your cost structure, refer back to the key resources and key activities section of the canvas. These are the key elements to make your business a success, and each will have a cost attributed to them. By understanding the most important and expensive elements of each, you can quickly identify the most crucial costs in your business model. Through this process, you will be able to define whether your business is more cost driven (lean cost structure, keeping costs to a minimum, which may be your value proposition) or value driven (focused on creating value regardless of cost, this would mean that you would have a premium value proposition).

There are a number of types of cost to consider. Fixed costs are the costs which remain the same, for example rent and salaries whereas variable costs alter regularly (these could be travel costs if your business involves travelling to different locations irregularly). As your company grows, your costs are likely to reduce. This is due to Economies of Scale (the more you buy, the cheaper it becomes) and Economies of Scope (incorporating other businesses which are directly related to your activities).

When thinking about revenue streams, it is important to ask yourself a number of questions. How much will customers be willing to pay for the value your product provides? What are competitor rates for which customers currently pay? How do they currently pay and how would they prefer to pay? How much will each revenue stream contribute to overall income?

There are several types of revenue:

  • Sale of products (of a physical good, e.g. a DVD)
  • A fee for usage (a fee for using a service, e.g. DHL)
  • Subscription fee (selling a continuous service, e.g. Spotify)
  • Lending/leasing/renting (giving the rights to an asset for a set period, e.g. renting a car)
  • Licensing (charging for use of a protected intellectual property, e.g. Microsoft Office)
  • Brokerage (an intermediary service between 2 parties, e.g. an estate agent selling a house on commission)
  • Advertising (charging fees for product advertising through your service, e.g. website advertising).

You can either fix your pricing by listing a price, and defining it based on features the customer segment it is for and the volume bought, or you can price dynamically. This would involve negotiating or bargaining a price, as is often the case on a market stall, or on a real-time-market – stock markets are a perfect example of this.

One thing I have certainly learnt through Access Regional is that you need several revenue streams, ideally 4 or 5. It can also be very difficult to attract sufficient revenue through advertising and this is hardly a stable stream, fluctuating depending on the deal you have in place at the time. This is also very much driven by competitors in your market and traffic to your website or magazine. This isn’t to say that they don’t work, but they probably shouldn’t be your main source of income. A subscription fee based model is often seen as very attractive to investors given the regularity of revenue.

Whichever cost structure and revenue streams you discover will work best to your business, it is important to assess the full business model canvas. All sections fit together like pieces in a puzzle, which provides a very visual and easy to understand map of your business.

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Customer Relationships, Segments and Distribution Channels

Having covered a third of the Business Model Canvas in previous posts, this entry will focus on the customer and distribution sections.

  • Customer relationships – what are the expectations of our customers, how will they integrate into our model and how costly will they be?
  • Customer segments – where is the value coming from and who are the most important customer segments?
  • Distribution channels – how are we going to distribute to our customers, how do we currently do this and what are the costs involved?

In order to ensure that you have a successful business, companies must identify the type of relationship they want to create with their customers. There are several types of customer relationships which can be built. Employee-customer relationships can be built through personal assistance, such as during and after sales service from a shop assistant. Dedicated personal assistance can provide a more intimate and hands on personal assistance, particularly found in high-end boutique stores which pride themselves on their customer relations.

Costs can be saved through creating automated relationships such as self-service relationships in which the customer is provided with the tools needed to serve themselves. Similarly, many internet companies base themselves on building automated services, which is a more intimate self-service relationship in which customers have the ability to select and identify their preferences (when you buy through for example).

Other companies can help their customers create a relationship, for example eBay use community relationships and offer a platform over which their customers can interact directly.

In order to identify your customers for which relationships are needed to be built in the first place, customer segmentation is required. Customers can be identified and segmented (or grouped) based on their needs and attributes. Once segmented, you can then meet these characteristics through the relationships you build and the product or service you provide.

A few examples of customer segments are: mass market for which there is no specific segment, but rather targeting a wide range of clients. Although on first thoughts this could make your target market limitless, by not adjusting your product for different needs, you may find that you can’t create any loyalty with any customers. A niche market is the opposite and is based on drilling down to specialised needs and characteristics of clients. Within each market, a company can apply additional segmentation within each group based on their characteristics, such as gender, age and income. A company could also serve several different segments with different needs and characteristics by applying diversifying segmentation: tailoring different products to different segments.

Once your customer segments and relationships have been identified, it is important to consider the channels through which you will reach them. Effective channels will distribute the company’s product or service (and essentially their value proposition) in an efficient and cost effective way, which is best suited to the customer. Clients can be reached through a company’s own channels, such as direct selling through shops, or by partner channel through major distributors, or a combination.

As with every aspect of creating a company, there is no right or wrong answer, but the process of customer identification through segmentation and relationships, and then how you will reach these groups, is key in order to ensure that you deliver your value proposition to the customer in the best possible way to meet their needs.

This blog is also available on the Kindle Store and you can follow me on Twitter (@benpfsmith)  to find out more or get in touch