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Experienced entrepreneur, David Tee, examines the ‘cost’ factor in businesses

This revolutionary way of looking at your business has become the preferred methodology used by investors and entrepreneurs alike to assess financial potential
David Tee

Serial entrepreneur, speaker and author

In Part 1 of this two-part article, we looked at the revenue side of the Business Model Canvas (BMC). In this article we will focus on the cost side – usually much easier to estimate but equally important in ensuring your business model is profitable. Costs cover the money required to develop the product or service that delivers the value proposition, and that which pays for the customer relationships required, and the communications channels used.

In order to assess the costs, your business needs to consider what activities you can, and more importantly, should do yourself, and those which you can outsource to a partner organisation. Understanding what your core value-add is in your business will help you focus on that aspect, making it the best it can be, and leave peripheral activities to third parties. 

In part one we used a small catering company as an example to show how the BMC revenue side could be developed. We will use the same example for the cost structure.

The first area to consider is your Key Resources. Which resources do you have (human, physical, financial) that underpin your business model? Which assets do you have that are essential to your business? For our catering company the key resources will be the kitchen staff, the recipes and dishes created and delivered, and the location of the shop / restaurant. For outside catering, having your own salesperson who knows your business inside out would be key.

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In order to assess the costs, your business needs to consider what activities you can, and more importantly, should do yourself, and those which you can outsource to a partner organisation

Under Key Activities, you need to consider what activities you need to perform well in order for your business model to be profitable, and identify which ones are critical to your success. For a catering business, the high quality of food would be the number one priority, closely followed by customer service – waiting staff, shop assistants, salesperson etc. The ambiance created within the restaurant would be a key activity to consider too. Do you want cosy, romantic, modern, family-oriented? For outside catering, providing the full ‘soup to nuts’ service including the tables, tableware, serving dishes (for buffet), branded serviettes etc would be important.

For the activities you need to do that are not part of your core business, you need to identify a strong set of Key Partners. Partners could be individuals you rely on for specific services (for example, your accountant) or companies that deliver a range of services (for example, a marketing agency). Partners should have your peripheral activities as their core business, so that they focus on providing you the best service that they can. You should seek out the best partners, ideally getting references from people you trust.

Unless it is trying to focus on field-to-place catering, our catering business will not grow its own ingredients. It will find these products in the market – possibly quite literally. In many big cities specialist markets exist for meat, fish, and fruit and vegetables. Chefs will often visit these markets very early to buy the best cuts, the freshest fish and ripest fruit. Relationships will grow between the chef and the supplier so over time suppliers know what the chefs want, and make sure the products are in supply. This partnership will guarantee the quality of the food ultimately provided to customers.

You still may decide to keep the loss-making units as they provide brand awareness or increase the perceived value of the company as a whole

A small catering company won’t have its own marketing department, but it still needs branding, marketing services, social media, shop signage, menus etc. The design and supply of such services could be handled by the owner, but by investing a small amount with a local marketing agency, a much better result can be delivered. For the outside catering business, getting good customer testimonials and using them on a simple website is valuable. Using social media to promote special events at the restaurant and keeping regular customers informed is a job that needs focus. An external partner, working just a few hours a week, can keep social media alive.

As you can see there are a lot of aspects that need to be put into the Cost Structure in order to see what it takes to run your business. Costing your key resources, key activities and key partnerships should be fairly easy. You should work out the costs against each Customer Segment (see Part 1) where you can so that, when you combine with the revenue, you can see which areas of the business are more profitable. Indeed, you may find some customer segments are making all the profit and others are actually loss making. You still may decide to keep the loss-making units as they provide brand awareness or increase the perceived value of the company as a whole.

Hopefully, you will have seen from the two articles the benefits of analysing your business using the Business Model Canvas. It allows you to break down the important aspects of the model into easily manageable parts, and then combine them again to get a full overview of the profitability of your company.

And, as you will see from the quote below, none of this is new: “Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.” Mr Micawber (From David Copperfield by Charles Dickens – 1850).

David Tee has over 35 years experience in technology development, entrepreneurship and international consulting. He has founded and worked in Cambridge IT startups, consulted for a Silicon Valley-based advisory firm, and supported the development of innovation-focused incubation services across the world. He is currently on assignment in Turkey, and lives between Europe and India.

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