How to Calculate the Total Cost of Ownership for an eCommerce Platform Implementation
September 24, 2020
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. From third-party apps and ongoing maintenance to solution partners, optimization, and more, the cost goes far beyond the licensing fee.
In this post, 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).
What Is TCO and What Does It Include?
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 licensing fee, hosting, extensions, third-party apps, feature development, design, and 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 need to 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.
Click here to download a TCO template.
Understanding Your Options
When evaluating eCommerce platforms, they will fall into one of three categories, on-premise, cloud, and SaaS.
• On-premise: This means the eCommerce platform will be installed locally on your company’s hardware system. Upfront costs include the purchase of the infrastructure, such as servers and the licensing fee. Ongoing costs associated with this option include 24/7 maintenance and support, data storage, security, backups, and software updates.
• Cloud: This means the platform vendor hosts and manages the software and customer data in the cloud while maintaining the infrastructure, distributing upgrades and bug fixes, and developing new features and enhancements. For example, Magento Commerce Cloud is a cloud-based solution that runs on Amazon Web Services.
• SaaS: SaaS, or software as a service, is a software licensing and delivery model where a third-party hosts and maintains the software application and is accessed via the Internet. The licensing fee is typically a monthly subscription.
Open-source eCommerce platforms can be on-premise or cloud-based, while SaaS commerce options can only live in the cloud. For cloud and on-premise 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 very beginning. Working together to outline the project strategy, functionality must-haves, and platform requirements will help you avoid any unforeseen issues down the line.
• As you’re exploring platforms, these questions will help you narrow down your options:
• How does the platform scale for future growth?
• What are the native out-of-the-box (OOTB) features?
• Can the platform accommodate heavy customization to meet our business requirements?
• What is the support offering?
• How does the platform handle peaks in our business?
• Can the platform meet the business needs of both B2B and B2C markets?
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, Magento Commerce Cloud comes with OOTB features like wish lists, gift cards, and loyalty and has over 150 extensions to solve any business need.
Start by evaluating which third-party applications you need based on how much revenue each one drives. This will help you determine which 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 or help you find an application that works with the eCommerce solution. Keep in mind 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.
Third-party applications have various types of pricing structures. Some applications will be free upfront but have monthly recurring costs, while others will have a one-time fee. There will also be an additional cost if you need to customize any of the modules.
Choosing a Certified Solutions Partner
Replatforming 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, UX, design, optimization, and business analysis. To accurately calculate your 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 Magento Commerce, will have certified developers with extensive platform knowledge and experience. They have established processes that will help you stay on time and budget. And lastly, they typically have years of experience that 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. As you’re vetting partners, ask the right questions:
• Are they a platform-certified partner?
• Can they meet both your immediate and long-term requirements?
• Have they worked with engagements similar to yours?
• What’s their typical timeline?
• Do they have success stories?
• Where are their resources located?
• What types of quality assurance and testing do they do?
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.
Finally, you need to define your five-plus-year roadmap and how the eCommerce platform aligns with that vision. 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 will cost you more in the long run to customize or replatform.
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 of 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.