In this issue, you'll learn:

1- Types of cost structures and strategies.

2- The mix and match approach and key confusion.

3- Purchasing Power Parity (PPP) and inflation.

Reading time: 2 minutes.

Strategyzer's cost structures

In the original business model canvas, we have two classifications:

1- Cost driven structure: Where cost and economics are a big part of the value, like Ryanair.

2- Value driven structure: Where customers are driven by high grade, like in luxury hotels.

Can you have both at the same time?

The difference between cost and benefit shows how valuable something is.

Let's call the top line "benefit" and the bottom line "cost."

You want that gap to get bigger. only then can you offer more value.

Working on the bottom line means that you have a price strategy.

When you focus on what makes your product or service different, this is called a "Differentiation strategy."

It's best when you can do both. Lowest price for highest benefit.

So the answer is: "Yes".

Key confusion

The main confusion here is quality. People attribute quality to the second type only.

Quality is an essential part of both. Since quality is defined as meeting requirements, a high grade is not always part of those requirements.

Successful, cost-driven models always meet their requirements.

What value-driven models provide is of a high grade. Physically or brand-wise.

An upgrade to strategyzer

We have extended this model into 4 types of structures using Porter's strategies:

1- Price leadership: You have the best price across the board.

2- Price focus: You have the best price for one or some companies, business units, products, or services.

3- Differentiation leadership: You provide a unique benefit across the board.

4- Differentiation focus: You provide a unique benefit from one company, business unit, product or service.

The SMB perspective

SMBs can't go with extensive strategies. This would necessitate a substantial investment, which is common among major players.

SMBs usually choose a focus strategy and grow with it.

The mix and match approach

This can be applied to business units, products, and services, not only companies.

You could also mix and match these strategies across your portfolio of companies, business units, products, and services.

You could actually be the cheapest and the one providing the most value that no one else provides at the same time, and this will give you a sustainable advantage.

This is now becoming possible and more accessible with the advent of the age of agility.

Porter denied it and said both are mutually exclusive and then acknowledged it.

To prove this with practical examples, companies like Youtube, Spotify, Netflix, and many others are providing prices at one tenth of the price in other regions for some countries with high inflation and low purchasing power.

PPP is a standard to automate this, and ease your price focus while balancing it with differentiation.

Read this great article about it:

What Is Purchasing Power Parity (PPP)? — www.investopedia.com

Purchasing power parity (PPP) is an economic theory that compares different the currencies of different countries through a basket of goods approach.

Practical stuff please!

I started with a focus strategy of differentiation, and have maintained it when other businesses were established.

Under a franchise agreement, my company was either the first in the area to offer a certain service, or it now has the sole right to do so.

And this is a favorable position. You have no reason to go into the price war when you have capabilities and a first mover advantage.

I only considered a price-focus strategy for one of my services when I lost exclusivity and the market became more price-sensitive.

And that was only through passive revenue from digital services where the scope became international and competition is already high.

But then, for SaaS or digital services, you could easily separate your time from your money and have flexibility in terms of pricing since margins are already high for digital services.

Wrap up

Your cost structure is a key part of your business model and your overall strategy.

The decisions you will make here for your SMB are very important for the future success of your company.

Choose what works with your SMB, and be consistent.

Those will depend on your capabilities and market conditions, so be flexible.

1- Focus is the best strategy for your SMB.

2- Avoid price wars by all means.

3- Know your capabilities and differentiate based on them.

4- Once your differentiation wanes, act accordingly.

5- It is good to mix between differentiation and price focus.

6- Don't get into differentiation leadership wars, those are only for large corporations and not all of them win.

Next week, we will cover the other part of our cost structure.

Fixed, variable, direct and indirect costs and the economies of scale and cost.

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