Business Model Canvas - Cost Structure
This article will cover the various types & examples of Cost Structures tailored to digital business models.
Cost Structures is one of the sections of the popular Business Model Canvas tool.
The Business Model Canvas was devised by Alex Osterwalder
Typical types of Cost Structures within digital business models shown in the biz model canvas
(1) Types of Cost Structures
Typical Cost Structures of Digital Business Models look like the below:
Cost of revenue:
Cost of goods sold
Cost of hosting and operating their IT technology, incl operations staff
Various types of depreciation expenses
Customer support & customer experience (for paying customers)
Research & development / Product / Technology:
maintaining and
enhancing existing functionality
+ adding new functionality
Sales & marketing:
Personnel cost for sales, sales support, business development, marketing, brand building, media, corporate communications
Customer support & customer experience cost for non-paying customers/users
Brand and performance advertising
General & admin:
Costs of overhead functions
Stock-based compensation for the senior executives
3rd party services, e.g. audit, legal, recruiting services, etc
Of course there is more detail to each of the above but this is a far more comprehensive list than you will find elsewhere
(2) Examples of Cost Structures
Now let’s take a look at examples of Cost Structures. The best way to do so is - as always - by looking at concrete, vertical-specific examples.
eCommerce
Examples of digital businesses in the eCommerce vertical include Amazon, Etsy, Wayfair and thousands of others.
Cost Structure example Amazon:
Cost of sales: inventory costs, content cost, internal transport cost
Fulfilment cost: operating and staffing fulfilment centres, physical stores, customer service centres, payment processing costs and more
Technology & content: employees costs involved in R&D, development, design and maintenance of their stores, curation and display of products and services made available on their websites stores and infrastructure cost
Sales and Marketing: advertising and personnel costs
General & admin: overhead cost, stock-based compensation (overhead areas), professional 3rd party fees
Content & Media
Examples of digital businesses in the Content & Media vertical include Netflix, YouTube, Spotify, Medium, Apple News and many more:
Cost Structure example Netflix:
Costs of revenue:
Content amortisation (biggest cost in the business)
Payment processing fees
Customer service
Streaming delivery costs (e.g. open connect costs, payroll)
Operations costs (incl cloud computing)
Marketing:
Advertising expenses
Payments made to our marketing partners, including consumer electronics manufacturers and others
Technology and development:
Cost of tech staff (involved in improvements to service offerings, testing, maintaining / modifying our UI, algorithms, merch and infrastructure)
General use computer hardware and software
General & admin:
Corporate staff, professional fees and other general corporate expenses
Sharing economy
Examples of digital businesses in the Asset & Service Sharing (=Sharing Economy) vertical include Uber, DoorDash, Airbnb among others:
Cost Structure example Airbnb:
Cost of revenue: payment processing costs, hosting costs, amortisation of internally developed software and acquired technology
Operations and Support: costs of customer support, customer relations costs, refunds and credits related to customer satisfaction, cost of host protection programs; and and allocated IT & facility costs
Product development: development of the platform, features, etc and allocated IT & facility costs
Sales and marketing: brand and performance marketing, personnel cost, including those related to our field operations, policy and comms, etc
General & Admin: general management, execs, admin employees (e.g. HR, finance, etc) legal fees, professional services,
Online Travel
Cost Structure example Booking.com:
You will see below that their cost structure is quite different from the above ones in that it more distinguishes by cost type rather than bundling by business model function.
Marketing:
search engine keyword ads
referrals from meta-search and travel research websites + affiliate programs;
offline and online brand marketing;
other performance-based marketing
Sales and other:
payment processing fees (merchant transactions)
3rd party cost that provide call center, website content translations
and other including the cost of various sales risk factors
Personnel: all staff cost and oncosts
General and Administrative: as per above
Information Technology:
software license and system maintenance fees
cloud computing costs and outsourced data center costs
payments to contractors
data communications and other operations expenses
Depreciation and amortisation:
amortisation of intangible assets, internally-developed and purchased software; depreciation of computer equipment and ppe
Social Media & Search
Examples of digital businesses in the Social Media vertical includes Meta’s Facebook, Instagram, X. Examples of Search Platforms include Google, Bing and others.
Cost Structure example Facebook:
Cost of revenue:
operation of data centres, such as facility and server equipment depreciation, salaries, benefits, and share-based compensation
energy and bandwidth costs
partner arrangements plus traffic acquisition and content acquisition costs
cost of goods sold (inventory cost)
R&D:
staff cost of those building new products as well as improving existing products (all costs are expensed as incurred)
Marketing and sales:
staff cost of those engaged in sales, sales support, marketing, business development, and customer service functions.
marketing and promotional expenditures, and professional services
General and administrative:
salaries, benefits, and share-based compensation for certain executives
legal, finance, human resources, corporate communications and policy
legal-related costs and professional services.
Software-as-a-Service:
Examples of digital businesses in the Software-as-a-Service vertical include Salesforce, most Adobe products and hundreds of thousands more cloud-based software products:
Cost Structure example productivity SaaS:
Sales & marketing
Research & development
Cost of revenue
General & admin
Critiquing the Biz Model Canvas (Cost Structure section)
Now that we have covered the Cost Structure section of the Business Model Canvas (BMC), it’s also time to discuss honestly some shortcomings of the BMC relating to this aspect.
As with all other parts of the BMC, it’s is aiming to please all types of business models and it remains very high level and of little value for our purposes. With our focus on digital business models only, we have been able to provide a far more specific definition of Cost Structures with many relevant examples that can be transferred to other digital business models.
We hope you enjoyed our coverage of Cost Structures including the differentiation of different types and the extensive list of examples relevant for Digital Business Models.
What we like more than the Business Model Canvas: the B-MAP
We have used the business model canvas for almost 10 years on a very regular basis and to cover many dozen companies. Over time, we have realised that it has its limitations.
That is why we have decided to use a presentation format based on the time-tested Value Chain method devised by Strategy Professor Michael Porter. It is a far better way to grasp key aspects of a digital business model than the canvas.
Prof Porter is the most cited scholar on competitive strategy and digital transformation (with almost 10x more citations than the respectively 2nd ranking scholar).
Our Business Model on A Page (B-MAP) is specifically developed for digital business models and based on the Value Chain.
We have decided to price our B-MAPs super-affordably to give everyone (including our many valued followers from lower-income countries) the opportunity to get kick-started on their innovation journey with this high value resource that includes a B-MAP + walk through video for each of the digital companies that are covered!