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When looking to purchase a new eCommerce solution or replatform an existing online store, you’ll likely calculate how long it will take for your investment to pay off. And you’ll consider the financial benefits to be reaped. Those return on investment (ROI) calculations are important, but they are only possible to make after you know the total cost of ownership (TCO) for your eCommerce solution.
TCO encompasses all costs associated with owning and operating your eCommerce website. It’s a longer-range look at the investment (usually over 3 to 5 years) but it is just as important. So, let’s look at what goes into the calculation of TCO, why it matters, and ways to get maximum benefits of eCommerce without an outrageous total cost.
What Is eCommerce TCO and Why Do You Care?
When you buy a new piece of equipment for the factory or warehouse, you know how much it is going to cost to acquire the asset and how much it will cost to operate. For example, if you buy a forklift, you know the exact purchase cost to the penny. If the forklift runs off propane, you can expect to go through an 8-gallon tank in about 8 hours of use.
You may perform quarterly preventative maintenance, but the purchase cost remains the biggest investment. Allocating a budget to buy the technology for an eCommerce website isn’t as straightforward as buying a forklift.
In addition to the price of acquiring the eCommerce platform, you’ll have development costs and costs to add additional features and get the new software integrated with your existing business solutions. When you buy a new forklift, you don’t have to worry if it will operate properly in the presence of existing forklifts, right?
Once developed and deployed, your solution will need to be maintained just like your forklift. Similar forklifts require similar maintenance. Depending on your approach to eCommerce, your maintenance costs can be very different.
That’s why it pays to take the time to calculate and compare the total cost of ownership of your different options before you make a purchase decision and allocate resources for development and launch. The solution that looks to cost the least up-front may, in fact, carry the highest total cost of ownership. That’s why you should care about TCO – and you should care very much.
Initial versus Ongoing Expenses
When calculating eCommerce TCO, it pays to calculate over a 3-to-5-year period. This span of time is sufficient to give you a good feel for the number. It will capture both the initial capital expenditure as well as several years’ worth of operating expenses. Use a time frame that’s too short, and you won’t have enough time to experience the upgrade, expansion, and maintenance processes that are common in eCommerce.
In calculating eCommerce TCO for a given solution to be compared to the TCO of other solutions, it helps to break down the total cost into the initial costs and ongoing expenses.
Initial cost of eCommerce
The initial cost of your website includes more than just the cost of the initial software license and resources. You’ll probably enlist the help of partners and analysts to help you scope your project and then there will be the cost to develop or adapt the code to your use case. Next, there will be the costs of plugins, widgets, and applications that you’ll want to add. Some plugins are free, and others are not.
Of course, there will be costs to integrate your new eCommerce software with your existing software. For example, if your goal is to automate order processing, then your eCommerce software will need to talk to your ERP software and possibly your warehouse and shipping solutions as well.
See? The cost for eCommerce is more than just the license. Those initial costs can add up. And we didn’t mention the cost of buying a domain name and other expensive fees you need to start operations.
Ongoing Expenses
Once that wonderful eCommerce website is developed, it will need to be hosted somewhere. That location won’t be free. So, you need to consider if you must invest in infrastructure ownership in-house to host the website and data or if you are going to pay to use a cloud-based hosting service. Then there are ongoing license fees. Some vendors charge yearly fees based on the number of users and others do not.
Many vendors charge transaction fees. This allows them to take a portion of each sale you make. That can be in addition to credit card processing fees as well. Some vendors charge per API call, so be sure to estimate those charges as well. Then there are the costs associated with ongoing maintenance to keep the website secure and up to date.
On-going expenses may be subtle, and the only way you will tease them out is by doing a total cost of ownership calculation.
Diving Deep Into the Key Components that Affect the Cost of Ownership in eCommerce
Now that you have a broad view of the total cost of ownership, let’s dive into the key components. Understanding your options when it comes to components is key to controlling your ownership costs for eCommerce. A SaaS solution like BigCommerce or Shopify may not cost much in development, but you also won’t get much flexibility, and you’ll likely pay higher transaction and license fees. That’s why it is important to consider all components and look out over 3 to 5 years. Here are the key components to include in your TCO calculation at a very minimum.
Cost to acquire the software
Depending on the approach you take to eCommerce, your acquisition costs may be minimal or substantial. For example, many proprietary software packages will charge a substantial initial license fee while others charge a minimal amount for the first few months and then increase the license fee. The size of your company also impacts software acquisition costs. The larger and more complex the company, the higher the first year’s costs.
Open-source software may be available for free, but the free version may offer limited functionality. You may need to pay a license fee to gain access to full functionality.
Other acquisition costs
If you are entering the world of eCommerce for the first time, there will be ownership costs associated with locking down your domain. If the domain you want isn’t available, you may pay a premium to acquire it.
What about hardware? If you host your website in-house, do you have the necessary hardware, backup, security, and disaster recovery ready, or will you need to make additional investments? What about the people to support the technology? Are they already in place?
Development costs
Development costs are all the costs associated with getting the software out of the box (so to speak) and getting it out on the internet in a usable format for customers and employees. You may have developers on staff that can do this work, or you may need to work with outsourced developers. Development includes how the eCommerce store will operate as well as how it looks.
Not all websites use the same architecture. The architecture approach you take (monolith, B2B modules, composable, headless, etc) will have an impact on your development costs. To control development costs, pick a platform that supports multiple approaches to architecture.
Read making sense of the buzzwords to learn more
Easily missed development costs
In the development stage, it may be easy to miss costs to acquire a theme (this controls how the webpages display), buy plugins to perform certain activities (like scheduling recurring orders), and extensions to connect with payment gateways.
Integration costs
An eCommerce platform rarely operates as a stand-alone solution. To automate processes, it needs to communicate with other business solutions you already have in place. Your eCommerce platform will need to integrate with your ERP and warehouse or order management systems, your marketing systems, your shipping systems, your product information management system, and the rest of your existing architecture.
Read more about SAP eCommerce integration
Integrations require APIs
You aren’t going to integrate your eCommerce platform without the use of APIs. JSON, XML, REST, SOAP, and a host of other acronyms describe APIs. What is important to TCO is to understand why APIs are important to your eCommerce infrastructure and how they impact your total costs.
If you select a solution with a rich API, you can control the costs of integration. In a nutshell, the more API options you have the easier and less costly it will be to integrate and the lower your total cost of ownership.
Training and onboarding costs
Before you deploy your new eCommerce solution, it’s important that internal teams know how to use it. Don’t forget to calculate the training costs for your staff and any costs associated with onboarding new clients. If this is your first eCommerce venture, then you’ll need to get existing clients transitioned to buying online. So, include those costs as well. Here again, you can control the acquisition portion of the total cost of ownership by selecting an intuitive solution that is easy to use.
We asked B2B buyers if their needs are being met. Here's what they said.
Ongoing infrastructure costs
Where will you deploy your solution, who is responsible for updates and security, and what infrastructure is required? When will the domain name need to be renewed again and what will that renewal cost?
Cloud-based solutions allow you to move many of the roles and responsibilities of hosting, maintaining security, and keeping the code up-to-date to off-site infrastructure. You’ll pay for the privilege of course, but over a period of 3 to 5 years, you may find it saves you money. You won’t need to invest in the hardware or human assets required to maintain it and keep it secure. When considering SaaS solutions, be sure to compare the cost to host on-site versus in the vendor’s cloud. You may find the cloud-based solution is the most economical in terms of ongoing infrastructure costs.
Recurring license and transaction fees
This category represents costs that are only captured if you calculate your eCommerce cost of ownership over several years. If the devil lies in the details, the costs can quickly lie in recurring fees and fees per transaction. These fees can be in addition to payment processing fees for handling PayPal or credit card transactions. Some fees are a percentage of the sale, others are a fee per transaction, while a third breed combines the two.
Calculating OroCommerce TCO and ROI
If you are thinking of entering the world of eCommerce for the first time or looking at eCommerce website migration options, calculating your TCO and ROI will be front of mind when comparing platforms.
Just as with any asset purchase, make your TCO calculations over the expected lifetime of the asset. For a website platform, a good rule of thumb is 3 to 5 years. This horizon allows you to get a good feel for recurring costs and ensures they are compared with the acquisition costs. What may cost less to acquire may cost more over 5 years and vice versa.
In addition, calculate your return on investment to see how much more revenue you’ll generate with each option. By using an eCommerce ROI model and TCO in tandem, you’ll select the eCommerce platform that’s best for your company’s needs.
Fortunately, OroCommerce simplifies the calculation process. Use our B2B eCommerce ROI calculator to automatically calculate based on your numbers. Simply fill in the blocks and feel free to replace any prepopulated boxes with data from other vendors to make calculating and comparing easier.
Summing Up – Calculate and Manage eCommerce TCO to Maximize Return
Knowing your eCommerce TCO is important to maximize the return on the technology investment. Like any other cost, it must be managed. Management begins with measurement: measurement begins with calculating the TCO of your solution.
You can manage eCommerce TCO by selecting a platform that provides almost all of the functionality you need right out of the box. For example, a native B2B eCommerce platform will almost always cost less to implement than an extended B2C solution to full B2b functionality. That’s because the fewer changes and add-ons you need, the lower the development costs to deploy the solution.
In addition, the API can make or break integrations, so minimize integration costs by selecting a solution with a flexible API.
Compare platforms with tiered pricing to those with per-transaction pricing to determine which model works best for your sales pattern.
Frequently Asked Questions
Where did TCO originate?
The total cost of ownership calculation came into use in 1929 in the railroad industry. It provided the cost basis upon which other financial calculations could be made. In 1987, the Gartner Group applied this financial calculation to the information technology industry.
Analysts posited that software and hardware were assets, and as such there were acquisition costs and maintenance costs incurred with both. The true cost basis of information technology could only be determined by looking at both classes of costs combined. Hence, TCO made the leap from physical assets to IT.
What is the difference between opportunity cost and total cost of ownership?
In business, opportunity cost is the amount of revenue or gain that is forgone by choosing one investment over another. For example, if faced with the choice of purchasing an eCommerce platform and a CRM, the opportunity cost of the eCommerce platform would be the amount of revenue that you lose by not having online sales.
The total cost of ownership is a completely different animal. This metric calculates the total amount of money a company must expend to purchase and maintain an asset. It includes acquisition costs and ongoing and recurring costs. It does NOT include the opportunity cost.
Can a TCO calculation work for any type of eCommerce?
Sure, it doesn’t matter whether the unified eCommerce platform is B2B, B2C, or B2X – the total cost of ownership must be calculated to determine the cost basis of the investment. Whether the eCommerce platform is a SaaS-based solution with a vendor lock-in or an open source solution, there are still costs for development and deployment as well as ongoing maintenance and training.
No matter the eCommerce model or platform, it’s important to calculate TCO over a 3-to-5-year period and compare your options.
Is it a good idea to calculate eCommerce total cost of ownership before switching to a new platform?
Absolutely! When comparing platforms, whether to start eCommerce or consider replatforming options, you should always calculate the total cost of operating this eCommerce option. When doing so, be sure to look over a 3-to-5-year time frame. You may find that the development costs may be offset by lower recurring costs and replatforming can potentially save you money. This is especially true if your current license model includes costs per transaction.
What items shouldn’t be considered when calculating the total cost of ownership?
When calculating the cost of ownership for eCommerce, you do not factor in costs associated with risk, opportunity cost, or return on investment. These are all important factors, but they are considered separate from the TCO.
For example, one option may have a low TCO, but a high risk, and a low return on investment. Even without looking at the opportunity cost you may take that option off the table. In addition, sunk costs are unrecoverable and should never be considered in any financial calculation.
