2.1 Cost structure
Cost structure identifies the costs underlying the business model. The questions at issue here are:
- What are the most important costs inherent in the business model?
- What costs are generated by the resources employed?
- What costs originate from the activities of the business model?
If the business model focuses on efficiency, the cost structure is cost-driven. The cost-driven business models tend to minimise the costs wherever possible by offering low price value propositions, extensive automation and outsourcing. Low-cost airlines such as EasyJet and Ryanair are good examples for cost-driven business models.
If the business model is oriented towards providing superior value to the customer, then the cost structure can be defined as value-driven. Value-driven business models tend to prioritise value creation by offering premium value propositions with a high level of customised services.
Based on attributes, costs could be classified as fixed costs, variable costs, economies of scale and economies of scope.
- Fixed costs are costs that remain the same no matter how many products or services are offered. For example, rents and utilities are typical examples of fixed costs. In the case of drone spraying, compliance and certification costs are fixed costs.
- Variable costs are costs that change in proportion to the quantity of products or services produced, such as plant protection product purchase costs in drone spraying businesses.
- Economies of scale: these are cost advantages that a business experiences as its output increases. See the previous section for more details.
- Economies of scope: these are cost advantages that a business gains as a result of expanding its activities in different industries or related businesses. In other words, the same resource can be used in different activities: a drone pilot can serve both an agricultural business, but in case of emergency the same company can be asked to offer drone delivery services and the pilot could be employed in this different activity.