With the digital revolution of recent years, many companies have considered creating an eCommerce store to sell their products. It is an important strategic decision for any organization. One of the main challenges is knowing how much it costs to run an eCommerce business, given the technological and operational needs you may have.
This is where the concept of Total Cost of Ownership (TCO) comes in. It is the sum of the initial cost of the eCommerce platform (license, plug-ins, development…) and operating costs over the first 3–5 years. It is an important analysis, since 43% of companies report that costs are higher or much higher than calculated in the TCO (source: Forrester).
Calculating the TCO for different platforms will help you decide before launching your eCommerce, stay within budget and minimize surprises down the road.
What should you consider when calculating TCO?
When we talk about the initial costs of an eCommerce store, we mean the license price, hosting, extensions (add-ons), third-party applications (plug-ins), feature development, graphic design and ongoing maintenance.
You also need to factor in opportunity cost, which plays a key role in TCO analysis. Opportunity cost is the value of the potential loss from choosing one platform over another. For example, a platform may be cheaper upfront but suffer frequent outages or issues, resulting in lost revenue and extra maintenance costs. Or a platform may fit your current requirements but be unable to scale in the future as your business grows.
How to calculate TCO
The most basic formula is:
TCO = Total costs / Annual sales
It is recommended to run this calculation over 3 years to know more precisely whether you are making the right decision.
As we mentioned, the hardest part may be knowing how much running your eCommerce really costs, since some expenses are hidden. It is also important to know that an online store does not cost the same in its first year as in its second. You can average the first three years to get an accurate estimate.
You can ask yourself a few questions that can help you estimate the total cost of your eCommerce:
- Subscription costs: these may be plug-ins, add-ons or the license, if paid on a recurring basis.
- Initial costs: the cost of the eCommerce project, its development and implementation (testing phase).
- Integration costs: ERP, CRM, WMS, PIM, etc.
- Fee costs: some payment platforms charge fees, which is an added cost.
- Monthly maintenance costs: technical maintenance, hosting, security, backups, etc.
- Staff costs: how many hours a week you spend keeping your eCommerce up to date.
- Unexpected costs: budget an extra 10–20%.
Total sales should be calculated on an annual basis, and it is important to factor in projected monthly growth so the TCO is useful for future estimates.
TCO differences between eCommerce platforms
The type of platform you choose for your eCommerce can change your initial costs. It depends on the programming language (PHP/Java), the code (open source/proprietary/custom) and the type of platform (monolithic or headless).
For some years now, the trend has been to use a headless platform with a Java core and an open-source front end, which gives you great flexibility when working on your eCommerce.
To simplify this process, let’s look at types of eCommerce platforms according to their technology:
- Legacy monolithic platforms: a single type of platform that requires a highly trained team to operate it. Bear in mind that with these platforms the back end has to be developed and there are few plug-ins and add-ons, which means extra costs if they need to be built.
- SaaS monolithic platforms: hosted in the cloud, with some flexibility to customize your platform. Bear in mind the cost of add-ons, which are bought from each platform’s marketplace and usually carry a subscription fee.
- SaaS headless platforms: the back end and front end are separated. The eCommerce provider delivers developments to make the store more robust, with no hidden costs. The administrator focuses on business strategy without worrying about updates and migrations. Full eCommerce customization. These platforms make omnichannel integration of online and offline channels easier. Bear in mind the cost of add-ons.
What matters is to choose eCommerce software that can grow with your business and meet your needs for years, since the initial cost is high and scalability will let you recoup it. If you are unsure, at Trilogi we can advise you and help you make the best decision.
Advantages of calculating TCO
Running this calculation helps you make purchasing decisions and have more information when choosing your eCommerce platform, which is an important decision. It also improves long-term financial performance, lets you decide whether to outsource certain teams and, above all, helps you calculate your business’s ROI. So involving your IT team in building a TCO can be very useful in choosing one eCommerce platform over another based on your costs and anticipated future needs.
In short, remember that overlooking “hidden” costs will significantly increase your TCO, forcing you to invest more without guaranteed results.
