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.

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

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