Choosing the right eCommerce platform isn't as simple as picking the solution with the most appealing features and design elements — you need to consider their total cost of ownership (TCO) to make an informed choice. In this article, we'll break down what TCO is, why it matters, and how to calculate it when evaluating eCommerce platforms.
Defining Total Cost of Ownership (TCO) for eCommerce
TCO is a financial metric that helps businesses evaluate the true cost of an investment over its entire lifecycle — not just what it costs upfront to get started. When it comes to eCommerce platforms, TCO includes both upfront and ongoing costs associated with selecting, implementing, and maintaining a platform. TCO is intended to be a broad measure rather than an exact formula - the ultimate goal of calculating TCO is to help expose substantial cost differences over time that are worth considering when considering a new technology.
As a rule of thumb, we count five years as a solid timeframe when it comes to calculating TCO.
Why TCO Matters When Evaluating Platforms
The TCO of an eCommerce platform can encompass other costs, aspects, and expenses of your business — let’s talk about those a bit more.
Return on Investment (ROI)
Calculating TCO is essential for assessing the return on investment (ROI) of an eCommerce platform. ROI estimates the potential financial impact of a particular investment over time. Only when you determine the TCO for a platform, can you determine if the solution will provide a satisfactory ROI.
Identifying Hidden / Ongoing Costs
When it comes to evaluating eCommerce platforms it is important to ferret out all costs. Some costs that may be easy to miss, include subscription fees, maintenance expenses, and the cost of necessary third-party integrations. TCO done right helps you uncover these your most impactful costs and avoid budget surprises down the road.
Making Data-Informed Decisions
TCO provides a data-driven approach to decision-making. Though it might seem obvious, comparing the TCO of different platforms can help you make an informed choice based on concrete financial considerations rather than subjective preferences.
Making Your Case for a Platform to Leadership / Executives
When you need to secure buy-in from leadership or executives for a specific platform, having a well-calculated TCO can strengthen your case. It demonstrates that you've thoroughly considered the financial implications of your decision and saves all parties from budgetary surprises down the road.
Common Mistakes Organizations Make When Evaluating Platforms That TCO Can Help Avoid
Before we delve into the specifics of calculating TCO for eCommerce platforms, let's highlight some common mistakes businesses make when evaluating platforms:
- Ignoring Ongoing Costs: Focusing solely on upfront costs can lead to budgetary challenges down the line — always be sure to look at the complete picture.
- Neglecting Scalability: Not factoring in your growth plans and the costs associated wtih this scaling can limit the accuracy of your TCO calculations.
- Overlooking Integration Costs: Failing to account for third-party integrations can make your TCO appear lower than it actually is — a dangerous miscalculation.
- Forgetting About Training: Training employees on a new platform can incur costs that are often underestimated.
How To Calculate TCO When Evaluating eCommerce Platforms
When calculating TCO for eCommerce platforms, it's common to break it down into two categories: initial costs and ongoing costs.
Initial Costs
Initial costs cover the expenses associated with acquiring and implementing a new product or solution. These costs may include:
- Design & Development: Development costs are essential to create and implement a product or solution. While some platforms, like closed-source software as a service (SaaS) solutions, might not necessitate extensive development, open-source platforms may require additional expenses for procurement and implementation. Development processes involve activities such as business cost analysis, audits, design integrations, and architecture structuring.
- Integrations: Integrating new software with your existing solutions, such as enterprise resource planning (ERP) or customer relationship management (CRM) systems, can be challenging and costly. Integration costs typically coincide with the development stage, with pricing contingent on factors like the integration's complexity and the number of required integrations.
- Extensions/Apps: Each eCommerce platform offers a unique set of features. To add specific functionalities, you might need extensions or applications, each with its own pricing models and payment methods.
- Implementation: The work to move designed and developed work into your production environment to make it ready for use.
- Training: Training is comprehensive and involves end-users from various departments within your business. The costs of training extends from pre-launch to post-launch and can accumulate significantly if not adequately planned.
- One-Time Setup Fees: Setup fees, depending on the service and platform you've chosen, can include domain name registration, templates, server configuration, integrations, and email setup.
Ongoing Costs
Ongoing costs, also known as operating expenses, encompass recurring fees associated with maintaining the software solution. These include:
- Software License: eCommerce software often offers two main pricing models: all-in-one or subscription-based. Subscription costs can vary based on the package chosen, requiring vigilant monitoring.
- Transaction Fees: Transaction fees may be included in the licensing agreement and are incurred with each transaction. They involve sharing a portion of your company's revenue with the platform distributor. If you use third-party payment gateways like PayPal, Square, or Stripe, you may face additional transaction fees.
- Marketing Costs: Marketing is essential for long-term growth and success — this includes SEO-driven processes, content marketing, and email campaigns. Marketing is also ongoing, requiring a consistent budget to measure and sustain your efforts effectively.
- Maintenance: Maintaining an eCommerce platform is similar to maintaining a vehicle — unforeseen costs, depreciation, warranty updates, and functionality losses can occur. Many eCommerce providers offer maintenance, support, and upgrade packages with the initial purchase, but they may have time constraints and limitations.
- Hosting: Especially with the popularity of cloud technologies available via subscription, not all platforms require hosting — but for those that do, it is essential to include these costs as part of your TCO.
- Internal Teams: Does bringing in a new technology require hiring for new skill sets? If so, make sure these costs are included as well.
- Support: Various support options are available for eCommerce platforms and from their partner agencies. These costs are often the most difficult to estimate and depend on several factors, including:
- eCommerce platform typical support needs
- Your future growth goals
- The level of complexity of your eCommerce implementation (added third-party modules, customizations, etc.)
- The hourly rate from your partner agency
- The efficiency of the agency’s work
- Time to Market: While sometimes a highly complex consideration, the sooner you have your new and improved eCommerce platform available, the sooner you will be able to begin seeing the benefits. The longer it will take you to launch, the longer your “time to market” — and there are costs you can assign to this for each platform.
- Unexpected Costs: As with any purchase, unexpected costs and fees may arise, such as consultations, contract purchases, or solution-specific hiring expenses. To prepare for unforeseen events, it's advisable to allocate a buffer in your TCO calculations.
The Importance of TCO Considerations When Evaluating eCommerce Platforms
Calculating the TCO for eCommerce platforms is a vital step in making an informed decision when evaluating different options. By considering both initial and ongoing costs, as well as ROI, you can ensure that your chosen platform aligns with your business goals and budgetary constraints. Additionally, avoid common evaluation mistakes and use TCO to make a compelling case to executives and stakeholders. Remember, TCO is just one piece of the puzzle — consider all aspects of a platform before making your final decision, and then prepare your site for the replatforming process.