How to Calculate the Total Cost of Ownership for an Ecommerce Platform Implementation
As you make the pivotal decision of choosing an ecommerce solution, you want to make sure there are no surprises or hidden costs during or after the implementation.
The cost goes far beyond the licensing fee – you’ll also need to consider:
- Third-party apps
- Ongoing maintenance
- Solution partners
In this guide, we’ll walk you through some of the aspects of your eCommerce solution and provide insights into achieving a better total cost of ownership (TCO).
In this ecommerce platform implementation guide:
- What is TCO in business and what does it include?
- How to calculate TCO
- Pros and cons of TCO
- Understanding your options
- Choosing a Certified Solutions Partner
- Creating a long-term strategy
- Frequently asked questions
What is TCO in business and what does it include?
Total cost of ownership (TCO) is the sum of all costs and expenses with buying, implementing, and managing your ecommerce solution. From a technical and fee perspective, this includes the:
- Design and build cost
- Pre-launch testing
- Licensing fee
- Hosting fee
- Payment-related fees
- Third-party apps and integrations
- SEO retainer fees
- PPC fees
- Maintenance of social media accounts
- Feature development
- Staff training
- E-mail service provider
- Consultant fees
- Ongoing maintenance
It’s not uncommon for platform licensing fees to change as a business grows. Ask each potential platform about its pricing structure and how it evolves as online revenue increases.
From a resource perspective, you should consider what mix of skills you need to successfully launch and maintain the platform. Calculating the TCO for each potential ecommerce platform will help you stay on budget and minimize any surprises further down the process.
Opportunity cost also plays a key role in the TCO analysis. The opportunity cost is the measure of potential loss when choosing one platform over alternatives.
For example, one platform may be cheaper but has a history of going down, resulting in lost revenue. Or you find a platform that works for your company now but won’t be able to scale as your business grows.
How to calculate TCO.
There are two ways to calculate TCO. The one you use depends on the context and what you intend to acquire.
The simple method consists of three factors:
- Initial cost (I) – how much you pay for the asset.
- Maintenance cost (M) – the costs to ensure the asset remains useful.
- Remaining costs (R) – the asset’s long-term price. This helps make a calculation with focus on potential devaluation.
The simple method equation: I + M – R = TCO
The other method of calculating involves more variables:
- Initial cost (I)
- Operation cost (O)
- Maintenance cost (M)
- Downtime cost (D)
- Production cost (P)
- Remaining value (R)
The equation: I + O + M + D + P – R = TCO
Pros and cons of TCO.
Using TCO for your ecommerce platform can be useful in lots of ways, but there are also some downsides to consider.
- Comprehensive analysis of costs involved with asset purchasing over its lifetime.
- Allows analysis of a single unit of business.
- Enriches decision-making.
- Helps operational efficiency.
- Supports strategic cost management.
- Uses alternatives to ascertain the best value assets.
- Provides a framework to compute ROI.
- Limited practical application.
- Intangible asset variation is limited.
- Risk associated with the alternatives is not included.
- Terminologies vary between industries.
Understanding your options.
When evaluating ecommerce platforms, they will fall into one of three categories:
Open-source ecommerce platforms can be on-premises or cloud-based, while SaaS commerce options can only live in the cloud. For cloud and on-premises options, it’s up to the merchant to keep the extension up to date.
We recommend involving key stakeholders such as team members from ecommerce, marketing, sales, and operations, in the process of choosing a platform from the start.
Working together to outline the project strategy, functionality must-haves, and platform requirements will help you avoid any unforeseen issues down the line.
Third-party applications vs. out-of-the-box functionality.
We often see brands try to reuse their original third-party applications without understanding what functionality comes prebuilt with an ecommerce platform. In reality, it can be more expensive to replicate the same applications in your new eCommerce solutions.
For example, Adobe Commerce Cloud comes with over 150 extensions to solve any business need, with OOTB features like:
- Wish lists
- Gift cards
- Loyalty cards
Start by evaluating which third-party applications you need based on how much revenue each one drives. This can help you determine the ones to drop, consolidate, or replace with a better solution.
Working with a certified solutions specialist will help you understand how native features could replace the additional fees that come with third-party applications. It could also help you find an application that works with the ecommerce solution.
Remember that evaluating your third-party applications is an ongoing effort. ecommerce platforms evolve, and you want to make sure your applications don’t overlap with native functionality.
Choosing a Certified Solutions Partner.
Re-platforming your current ecommerce site or launching a new ecommerce initiative requires a unique set of skills, such as:
- Project management
- Front- and back-end development
- Business analysis
To accurately calculate TCO, you’ll need to determine whether you’ll bring these skills in-house or hire a certified solutions partner.
Working with a solutions partner has its benefits. Partners that specialize in a specific platform, such as Adobe Commerce, powered by Magento, will have certified developers with extensive platform knowledge and experience. They have established processes that help you stay on time and budget. And lastly, they typically have years of experience they can leverage to offer both technical and strategic guidance.
Choosing a solutions partner solely based on price can cost you more in the long run. Make sure you ask the right questions when vetting partners.
If you prefer to have an ecommerce team in-house but don’t want to spend a significant amount of time training, you can use staff augmentation to fill front- and back-end developer and project management roles.
Staff augmentation gives you the ability to hire experienced staff that can quickly ramp up and add value to your project. Either option you choose – staff augmentation or solutions partner – will affect your TCO.
Creating a long-term strategy.
Finally, you need to define your five-plus-year roadmap and how the eCommerce platform aligns with that vision. Consider the following:
- If you plan to grow online sales and traffic in the next five years, will the platform be able to scale?
- Is the platform flexible enough to adapt to changing customer behaviors?
- How often does the platform release new functionality?
If a platform can’t align with your long-term vision, it may cost you more in the long run to customize or re-platform.
Once you’ve chosen your platform and launched the new site, think about what resources you’ll need to optimize the customer experience. Optimization is an ongoing process that requires continuously evaluating, testing, and updating the UX and design. You may need an A/B testing platform or a partner to help you run tests and analyze results.
Determining TCO for an ecommerce solution is not as straightforward as comparing licensing fees. Shedding light on all the elements that go into calculating the cost of implementing and maintaining an eCommerce solution will help you eliminate the unknowns and make informed decisions.
Calculating the TCO – frequently asked questions.
What is the hardest part of TCO analysis?
The most difficult aspect of TCO is identifying all the costs. When your costs need to include allocating management overhead, supporting IT servers and performing backups, there are no definitive answers, only estimates.
Where did TCO originate?
Many experts believe that TCO was conceived in Napoleonic times. Engineers would assess the efficiency of their weapons by analyzing their service life, repairs required, and other factors.
The concept was formalized by the US Department of Defense in the late 1990s, when it wanted to assess the total costs associated with its defense program.
Can a TCO model work for any type of eCommerce?
Yes, TCO models work for all four types of eCommerce, which are:
- Business-to-consumer (B2C)
- Business-to-business (B2B)
- Consumer-to-business (C2B)
- Consumer-to-consumer (C2C)