Running a business is all about balance between growth, costs and value creation. The hopeful ROI mostly depends on cost structure. Still, what is cost structure in business model canvas ?
Among nine core Business Model Canvas (BMC) blocks, cost structure maps all the costs needed to run your business.
If you do not manage business costs well, it could be 20% over budget on ads and labor costs could rise by 40%. Still, without focusing on retention, businesses will lose customers and waste money acquiring new ones.
To avoid this, businesses should use digital tools and AI to cut 40% of labor costs. Then optimize ad spending to reduce costs by 15-20% and invest in CRM systems.
After that, manage loyalty programs to keep customers and reduce acquisition costs by 5X. A well-managed Cost Structure leads to a profitable, sustainable and scalable business. Let’s explain several vital objects.
What is Cost Structure in Business Model Canvas?
The Cost Structure shows the total costs a business needs to operate. It includes both fixed and variable costs. These costs are necessary to create value for customers and run the business.
Definition and Role
Cost Structure = All costs a company pays to operate.
Role: Helps manage expenses and ensure profits.
Resource Allocation
Businesses use fixed costs (e.g., salaries, rent) and variable costs (e.g., marketing, production) to deliver value. Smart allocation of resources creates better value while controlling costs.
Example (SaaS Business):
Fixed costs = $50,000 per month.
Variable costs = $10 per customer.
If 1,000 customers are acquired:
Total cost = $50,000 + ($10 x 1,000) = $60,000.
Cost per customer = $60,000 ÷ 1,000 = $60.
Balancing these costs well helps the business stay profitable.
Cost Structure and Profitability
Mapping the cost structure helps businesses identify areas for cost reduction. This ensures accurate cost allocation and improves profitability by focusing on per-unit costs and cost trends.
1. How Purposeful Cost Structure Helps in Cost Reduction
By breaking down costs, businesses can spot inefficiencies and reduce unnecessary expenses.
Example:
A subscription-based online business identifies high server maintenance costs. So they count:
Monthly server cost: $5,000
After optimization: Cloud provider cost drops by 20% → $4,000.
Cost saved = $1,000/month → Increases profitability.
2. Role of Financial Analysts in Accurate Cost Allocation
Financial analysts ensure all costs are correctly allocated to products, services, or departments. This is essential for pricing and maintaining profitability.
Example:
A business has 2 central departments: Marketing and Operations.
Total monthly overhead: $10,000
Analyst allocates 60% to Marketing ($6,000) and 40% to Operations ($4,000).
This allocation ensures that each department’s profitability is accurately assessed.
3. Mapping Per-Unit Costs and Cost Trends
Businesses can adjust pricing or operations to improve profitability by counting per-unit costs.
Example:
Product cost: $30/unit
Fixed cost: $5,000/month
If they sell 200 units/month, the total cost is:
Variable cost per unit: $30 → Total variable cost = $6,000 (200 units × $30).
Total monthly cost = $11,000 ($6,000 + $5,000).
Per-unit cost = $11,000 ÷ 200 units = $55/unit.
If the business raises the price by 10% ($55 → $60), profit increases by $5/unit.
Primary Blocks of the Business Model Canvas and Cost Calculation
The nine Business Model Canvas (BMC) blocks shape how a business runs. These are:
Customer Segments – Who are your customers?
Value Propositions – What value do you offer them?
Channels – How do you reach and deliver value to them?
Customer Relationships – How do you interact with customers?
revenue streams business model canvas– How do you make money?
Key Resources – What assets are crucial for your business?
Key Activities – What must you do to deliver your value?
Key Partnerships – Who are your external partners and suppliers?
Cost Structure – What are the costs involved in running the business?
Still, Each block directly affects costs. Let’s explain:
How They Relate to Costs?
A . Customer Segments & Channels → More ads & marketing spend (35%).
The average CPC for Search Ads is $2.69, while Display Ads average $0.63 (storegrowers.com).
B . Value Proposition & Product Development → Higher content & innovation costs (10%).
C . Key Resources & Activities → Need tech, AI, automation (25%).
Companies implementing AI automation have reported average cost reductions of 12% over the next five years (copy.ai).
D . Customer Relationships → CRM, support, & email campaigns (15%).
E . Key Partnerships → Lower in-house costs, but partner fees apply.
How do Businesses Calculate Costs?
To explain this part definitely follow this visionary way:
Ad Spend Calculation (35%)
If a company invests $10,000 in ads, $3,500 goes to customer acquisition.
ROI Check: If the cost per click (CPC) is $2.69, they get 3,500 / 2.69 = 1,300 clicks.
If 3% convert, they get 39 customers.
Tech & digital tools or AI Costs (25%)
AI automation cuts labor by 40%, but AI tools cost $2,500/month.
Example: Chatbots reduce support staff, saving $5,000/month (cloudester.com).
Customer Retention Costs (15%)
$1,500/month in email, CRM and loyalty programs.
Retaining a customer is 5X cheaper than acquiring a new one.
AI & CRM tools can reduce customer support costs by 25% (ft.com).
Hence, a well-planned cost structure means higher profits & scalability.
Business Model Canvas Cost Structure Example (Types of Costs)
The Cost Structure shows where your money goes and helps you manage expenses. Let’s explain the different types of your cost structure. A well-planning of these allows you to make better decisions and plan for the future:
Comparison of Focal Cost Types in Business Model Canvas
| Cost Type | Definition | Example | Calculation & Impact |
| Fixed Costs | Costs that stay the same no matter what | Rent = $5,000, Salaries = $10,000 | Total = $15,000/month = 30% of monthly revenue ($50,000 |
| Variable Costs | Costs that change with sales/production | Materials = $500, Shipping = $200 | Total = $700 (for 100 units). Per unit cost = $7/unit = 14% of revenue |
| Semi-variable Costs | Costs that have both fixed and variable parts | Utility bill = $100 (base) + $1/unit | Total = $600 (500 units). More use = higher cost |
| Direct Costs | Costs linked directly to making the product | Material = $10/unit, Labor = $5/unit | Direct cost for 100 units = ($10 + $5) x 100 = $1,500 = 30% of revenue |
| Indirect Costs | Costs not tied to a product but needed to run the business | Admin Salaries = $3,000, Rent = $2,000 | Total = $5,000/month = 10% of revenue |
| Operational Costs | Everyday costs to run the business | Rent = $5,000, Salaries = $4,000 | Total = $9,000/month = 18% of revenue |
| Capital Costs | One-time costs for assets that last a long time | Machinery = $50,000 (Depreciated) | Annual Depreciation = $10,000 = 20% of capital spent per year |
| Sunk Costs | Costs that can’t be recovered | $5,000 spent on a failed ad campaign | No impact on future decisions; irrelevant for future planning |
1. Fixed Costs in Business Model Canvas
Let’s know why fixed costs matter for profitability:
Stability
They provide predictability in cash flow. You know your minimum expenses each month.
Efficiency
A business can improve profit margins by reducing fixed costs without increasing sales.
Main Areas to Manage Fixed Costs
| Fixed Cost Type | Example | Impact on Profitability |
| Rent | Office space | High fixed cost; long-term lease |
| Salaries | Staff wages | Consistent cost; can’t easily cut |
| Software Licenses | Marketing tools | Ongoing, necessary cost for operations |
2. Variable Costs in Business Model Canvas
Why Variable Costs Matter for Profitability:
Scalable
As sales increase, costs rise—but the business can adjust quickly.
Control
If variable costs are high, profitability drops. Lowering them boosts profit margins.
Central Areas to Manage Variable Costs
| Variable Cost Type | Example | Impact on Profitability |
| Materials | Raw materials for products | Increases in production volume |
| Shipping | Delivery costs | Increases with order size |
| Marketing Spend | Pay-per-click ads | Increases in ad spend/traffic |
3. Semi-variable Costs (Mixed Costs) in Business Model Canvas
Why Semi-variable Costs Matter for Profitability:
Fixed Component
Ensures a minimum cost even if there’s no usage.
Variable Component
Increases as usage grows, which can be controlled.
Primary Areas to Manage Semi-variable Costs
| Semi-variable Cost Type | Example | Impact on Profitability |
| Utility Bills | Base + usage (e.g., water) | Fixed baseline + usage increase |
| Employee Overtime | Fixed base salary + overtime | Can increase based on the workload |
| Telecom Services | Monthly fee + usage charges | Can grow with customer demand |
4. Direct Costs in Business Model Canvas)
Why Direct Costs Matter for Profitability:
Pricing Strategy
The more direct costs, the higher the product price is needed to maintain profit.
Cost Control
Efficient management of direct costs directly raises profitability.
Main Areas to Manage Direct Costs:
| Direct Cost Type | Example | Impact on Profitability |
| Raw Materials | Ingredients for food | Directly impacts production cost |
| Labor | Worker wages | Increases with higher production |
| Manufacturing Costs | Equipment, energy | Fluctuates with production levels |
5. Indirect Costs in Business Model Canvas
Why Indirect Costs Matter for Profitability:
Fixed nature
They don’t change with production levels, so they must be controlled.
Operational efficiency
Reducing indirect costs increases profit margins without affecting sales.
Vital Areas to Manage Indirect Costs:
| Indirect Cost Type | Example | Impact on Profitability |
| Rent | Office space | Fixed cost, hard to change |
| Utilities | Electricity, internet | Increases with usage |
| Salaries | Admin staff | Fixed, essential for operations |
6. Operational Costs in Business Model Canvas
Why Operational Costs Matter for Profitability:
Cash Flow Impact
High operational costs reduce available funds for growth and investment.
Efficiency
Lower operational costs improve overall profitability without increasing sales.
Key Areas to Manage Operational Costs:
| Operational Cost Type | Example | Impact on Profitability |
| Marketing | Online ads, campaigns | Can be optimized for better ROI |
| Salaries | Staff not involved in production | Fixed cost; efficiency matters |
| Software | CRM, email tools | Can be scaled based on the need |
7. Capital Costs in Business Model Canvas
Why Capital Costs Matter for Profitability:
Upfront Investment
These costs affect cash flow immediately but lead to long-term benefits.
Depreciation
Capital assets lose value over time, affecting financial reporting and future investment.
Vital Areas to Manage Capital Costs:
| Capital Cost Type | Example | Impact |
| Equipment | Machinery, tools | High upfront cost but increases production efficiency |
| Property | Office or factory space | Long-term investment with fixed costs |
| Vehicles | Delivery trucks | High initial cost, but essential for logistics |
8. Sunk Costs in Business Model Canvas
Why Sunk Costs Matter for Profitability:
Irrelevant for Future Choices
Past spending doesn’t affect future profitability.
Avoiding the Fallacy
Don’t let sunk costs influence decisions, such as continuing a failed marketing campaign to recover previous losses.
Specific Areas to Manage Sunk Costs
| Sunk Cost Type | Example | Impact on Profitability |
| Failed Campaigns | Marketing ad spend | Past spending is irrelevant to future decisions |
| Expired Inventory | Unsold stock | Investment already lost can’t be recouped |
| R&D Expenses | Unsuccessful product development | Don’t continue investing if not profitable |
How Cost Structure Affects Business Decisions
In online businesses, cost structure is critical in shaping operations, pricing and long-term strategy decisions. The particularity lies in the perspective of cost-driven vs. value-driven business models.
1. Cost-Driven Business Models
These models focus on minimizing costs. The goal is to offer low-cost products/services by optimizing processes, automating tasks and reducing overheads.
Example:
Online marketplaces like Amazon use automation, AI and logistics optimization to reduce shipping costs.
Cost to ship a product: $4 per item
Reduction after optimization: 20% → $3.20 per item
2. Value-Driven Business Models
These models focus on delivering high value, even if it means higher costs. Premium features, better customer experience and top-quality products are prioritized.
Example:
Netflix: Offers exclusive content and seamless streaming, justifying a higher subscription fee.
Cost per user: $10
Revenue per user: $15, maximizing value rather than minimizing cost.
Cost Allocation and Its Importance
Cost allocation assigns business costs to specific products, services, or departments. It helps businesses understand where their money is going and ensures accurate pricing and profitability analysis.
How Businesses Assign Costs
Businesses allocate costs based on cost pools and allocation bases.
Example: Online Business Cost Allocation
| Cost Pool | Allocation Base | Total Cost | Allocated Cost |
| Overhead | Labor Hours (300 hrs) | $6,000 | $3,000 |
| Maintenance | Machine Hours (100 hrs) | $5,000 | $2,000 |
| Marketing | Direct Allocation | $2,000 | $2,000 |
Conclusion
Thus, proficiency in designing a well organized cost structure work most to cut costs and build a strong foundation. With wise moves, you’ll enhance profits, grow faster and make your business vigorous.
FAQ
How to calculate costing?
Total Cost = Fixed Costs + (Variable Costs × Sales)
Cost Per Unit = Total Cost ÷ Units Sold
Adjust with automation to reduce costs by 20%.