What is cost-driven and value driven?
Cost-driven. Cost-driven business models minimize costs wherever possible, often through a low price Value Propositions, maximum automation, and extensive outsourcing. Value-driven. Value-driven companies focus on a premium Value Proposition, often with a high degree of personalized service.
Cost-driven business models focus on minimizing costs wherever possible. This approach aims at creating and maintaining the leanest possible Cost Structure, using low price Value Propositions, maximum automation, and extensive outsourcing.
Value-driven structures are focused on providing more value or revenue through premium offerings or services. Companies that embrace a value-driven structure use customer intimacy and high-end components to create premium products.
Types of Businesses by Cost Structure
While both ends of the spectrum are either cost or value-driven, most businesses fall somewhere in between. Management can identify key resources or a key activity in their operations to determine if their model is cost or value-driven.
The cost structure is one of the building blocks of a business model. It represents how companies spend most of their resources to keep generating demand for their products and services. The cost structure together with revenue streams, help assess the operational scalability of an organization.
In a values-driven culture, employees find alignment between their personal values and the organization's values creating a unified and motivated workforce. Management and leadership set examples for their organizations and live the values they preach.
- Variable costs: This type of expense is one that varies depending on the company's needs and usage during the production process. ...
- Fixed costs: Fixed costs are expenses that don't change despite the level of production. ...
- Direct costs: These costs are directly related to manufacturing a product.
Examples include sales commissions, product cost, cost of labor and raw materials used in manufacturing, etc. Conversely, fixed costs are those that occur irrespective of the volume of selling or business activities. They are costs that accrue due to the passage of time such as insurance, salaries, and rent.
The four main cost structure types are: value-driven structure, cost-driven structure, economies of scale and economies of scope. The three ways you can analyze your business' costs are: cost allocation, cost behavior analysis and break-even analysis.
Cost structure refers to the various types of expenses a business incurs and is typically composed of fixed and variable costs. Fixed costs are costs that remain unchanged regardless of the amount of output a company produces, while variable costs change with production volume.
What are the differences between cost-based and value-based pricing?
Cost-based pricing can be described as a strategy to determine the selling prices of a company's products based on their production costs, while value-based pricing is a strategy of setting prices of a product or service based on its value perceived by customers.
Value-based pricing ensures that your customers feel happy paying your price for the value they're getting. Pricing according to the value your customer sees in your product prevents you from short-changing yourself while creating an experience for customers that's most aligned with their expectations.
Cost-based pricing can also ensure a steady rate of profit. This is one of the few pricing strategies that can guarantee a profit. Regardless of the state of the industry, if you price your goods and services in relation to their production costs, you will generate revenue.
Costs are broadly classified into four types: fixed cost, variable cost, direct cost, and indirect cost.
A value proposition is a simple statement that clearly communicates the product or service benefit you promise to deliver to your customers. It's ultimately what makes your product attractive to your ideal customer.
A cost model is a method or framework for determining the total value invested to deliver a product or service. The scope and detail of the process can vary depending on the situation, but the goal of all cost modeling is to find an accurate way to assess value input for comparison against value output.
The Cost Structure is the last – but not least – component of a Business Model. It gathers the most important costs involved in the whole operation from the outset. This is the final block, precisely because we need to have all the previous components already defined so we can estimate the costs of each one.
Identifying the cost structure and its proper allocation also helps in finding out which products are most profitable and which are less profitable. Therefore, a business can then effectively allocate its resources to the production and sale of more profitable products.
Why is addressing cost structure one of the final things to consider on the business model canvas? Startup businesses must be in business for several years before they can accurately determine their financial position. A business cannot determine the cost until it has assessed specific customer demands.
27. May. In the Business Model Canvas, the Revenue Streams component encompasses the money that the company generates with each previously defined Customer Segment. But that does not mean the “profit” earned, but the revenue flow involved. As you may have guessed, the heart of the Business Model is the Customer.
