Total cost of ownership of different types of ecommerce platforms

The importance of TCO in the ecommerce industry

Total cost of ownership analysis is a powerful business tool that helps evaluate the return of investment (ROI) and return on time invested (ROTI). In addition, it provides clarity and understanding of the indirect expenses, such as maintenance, support and update fees, that will add up during the product's lifecycle.

The TCO estimation lets you examine the financial impact of the investment, especially in large projects such as ecommerce replatforming. Operational costs over 3-5 years that aren’t included in the initial budget make up, depending on the platform type,  about 40%-60% of the total cost of ownership. Part of those additional expenses will show up early in the project. That indicates how important it is to consider them from the start to avoid strain on the budget.

Early miscalculations of the investment cause several problems at the early stage of the project and in the next 3-5 years.

One of the problems is going over budget and compromising on the particular deliverables or the whole scope. A compromised foundation leads to extra spendings during every stage of the platform's lifecycle. Any action would be harder which makes development unnecessarily expensive. You will be limited in ideas or new features that you would want to implement. In the worst-case scenario, expenses will increase to the point where a new platform will be unsustainable and the whole project may end up as a waste of money. 

Total cost of ownership KPIs

There are two different measurements to assess the profitability and sustainability of your platform. You will use both of them to get the full picture of your investment and its influence on your business. 

• Total cost of ownership as a gross merchandise value (GMV) percentage - To assess if the total cost of ownership for your platform is sustainable, it’s important to check how much of your yearly revenue you need to reinvest. This indicator is the TCO expressed as a percentage of gross merchandise value (GMV). It provides you with clarity on how cost-effective the new platform is, and allows further forecasting. You don’t want this KPI to come up to be more than 1%.

  

• Total cost of ownership expressed as a percentage of capital expenditures (CapEx) and operational expenditures (OpEx) - Capital expenditures are all investments on product development, including a new platform. Operational expenditures are all spendings related to the maintenance of the product or system. 
  
  

  CapEx and OpEx make up your budget. To grow your business, you will be investing in various technologies and spending much of your budget on the company's operations. You don’t want to be held back by spending the bulk of the budget on ecommerce software. To assess the effectiveness and sustainability of your platform choice,  determine what percentage of CapEx and OpEx is the complete amount of TCO and if this percentage is dropping year to year significantly. If it’s falling around 2% yearly, you might need to look for another provider.

The key components of TCO

To simplify the process of calculating the total cost of ownership of your ecommerce platform, let’s split it into nine major components. We will evaluate them across four types of ecommerce technology:

• Legacy monolithic platforms, one-size-fits-all, complex monolithic platforms requiring highly skilled operating team. 
  Examples: Magento, Salesforce
  

• SaaS monolithic platforms, cloud-based software with limited flexibility providing semi-customizable stores.
  Examples: Shopify, BigCommerce

• Headless SaaS platforms decouple the front-end presentation layer from the back-end ecommerce engine. It ensures the full customization of the platform. 
  Examples: Commercetools, Commercelayer
  

• Headless industry-specific platforms through an API-first approach and an extensive set of features, are tailored to a particular industry.  
  Examples: Centra

1. Development expenses

The lion’s share of replatforming initial costs goes towards development. It consists of four elements: design, back end development (the engine of a platform), front end development, and plugin development.

• Storefront design. A generic-feeling website built using cookie-cutter templates is not going to cut it for the new generation of shoppers. Most ecommerce platforms offer a variety of free templates that might be a good option for an emerging micro-business, but won’t work for an international brand. 

• Back end development. For your shop to work smoothly you need to maintain and update all plugins and implementations. This point doesn’t apply to every technology. Cloud-based, SaaS and headless platforms such as Shopify or Centra, typically don’t require additional back end development. On the other hand, open-source platforms, like Magento or Salesforce, have a high cost of required development. This cost would depend on the platform, country, and the chosen development partner. 

• Front end development. With any type of ecommerce platform, you require an initial frontend development to create your storefront. You need to find a dedicated partner, and the price will depend on the platform, country, time-to-market, and efficiency of the partner. 

• Plugin or app development. It’s the most expensive part of the development process. Each ecommerce platform has a different feature set. Universal platforms lack crucial industry-specific functionalities so you need to buy them. New features are added by extensions called modules, plugins, or apps. The cost of adding apps to your platform depends on the type of your platform, the type of plugin, and the pricing model.
  
  Plugin or app development can be a one-time payment, monthly fee, transaction fee, etc. Before you contract the provider, think about features you need to add and how they’ll be charged. A typical enterprise needs around 20-60 modules and the cost of that can easily come up to hundreds of thousands of dollars. Then try to forecast your growth by calculating app expenses if the pricing model is transaction-based. 
  
  Apps-related expenses can be so significant that they could sway platform choice.
  

Comparison of development costs across different types of ecommerce platforms

2. Additional integrations

There is a lot of additional software crucial for your business success and which you want to add to your platform. Each ecommerce platform has a different default setup, some include:

• simple enterprise resource planning (ERP) 

• customer relationship management (CRM)

• content management system (CMS)

• inventory management software (IMS) 

To properly calculate third-party costs, it’s important to assess what additional software you need. Look at your current platform and check if your new platform has the same setup.

For example, you might’ve been working with a platform that had a CMS, but you’re choosing the provider that doesn’t have that option, so you will look for an external CMS to connect to your stack. Even if your new platform offers additional software like ERP, assess if it's going to fulfill your requirements now and in the future.

You need an integration with various technology partners to deliver the customer experience you’re going for and it incurs additional expenses. There are three different categories of fees within this section. First, the purchase price of each chosen software, then the integration fee and the licensing fees for the next 3-5 years. 

Finally, the integration itself occurs during the development stage and is an initial investment. And many factors influence integration pricing, such as the number of systems to integrate, complexity of those systems, and the overall architecture.

Make sure to consider all expenses coming from third parties and then add them to the total cost of ownership. 

3. Infrastructure fees

Infrastructure costs are split into three sections: hosting, domain and security.

• Hosting is the most expensive infrastructure fee.  It depends on your business size, platform provider, type of ecommerce platform, and the complexity of your infrastructure. If your business is small and requires no infrastructure, the hosting calculation will be easy and spending reasonable.
  Middle-sized and big enterprises require different, harder to cess, and more expensive hosting systems. They need a scalable option ready to handle large capacities of traffic and seasonal spikes, e.g. Black Friday, Boxing Day, Christmas, Valentine's Day, and other sales.
  
  Generally, composable technology has the most complicated hosting. You will be paying for two different hosting services, for back end, and for the front end side. There are four different hosting types:
  
  

• Domain. Buying a domain varies depending on your brand's name. It’s an easy and affordable purchase unless your preferred domain name has already been purchased. Then the price depends solely on the owner and buyback might cost thousands of dollars. After the purchase, you need to make a once-a-year payment to keep your domain.
  

• Security comes in a variety of prices and payment options. You need an SSL certificate for your website but you can get it for free from places like Let’s Encrypt or as a monthly subscription, once-a-year payment or a lifetime purchase. 

Comparison of hosting costs across different types of ecommerce platforms

4. Platform licensing 

Platform licensing is split into two sections: software fees and revenue-based fees. You will be paying both. They vary depending on the technology you choose and the size of your company. When assessing the potential spend, first consider your growth plans and potential pricing plan change over time.  

• Revenue-based fees. There are three most popular pricing strategies. Check the pricing model and then make a few rough calculations with different revenue scenarios. Here is how you might be priced:
  

  • GMV percentage fee. It’s a percentage paid from all your revenue. Verify whether this percentage is sustainable for you. There are a few ways that providers calculate GMV. It might be a flat fee based on a three or four-year-long commitment and it’s spread across the time. The more you commit, the smaller percentage you will pay, but if you don’t achieve the contracted revenue, you will need to renegotiate the terms based on your sales. Some providers like Shopify don’t negotiate the percentage and it’s the same for everyone.
    

  • Revenue tiers. It’s a fixed fee for a few different tiers of revenue. Tiers depend on the provider. For example, you’re paying a certain amount < $10,000,000, then a different amount $10,000,000 - $25,000,000 and a different amount > $25,000,000. Although it is a popular model, used for instance by Magento, it’s the most risky one. If your business starts to grow unexpectedly, you might find yourself at a new revenue tier, forced to look for a new platform just because the fee is unsustainable.
    

  • Transaction-based fee. Some ecommerce platforms choose to take a small percentage from each transaction. The fee is fixed, but it's a comfortable situation, where you pay according to your revenue without forecasting your growth and committing to an estimation or trying to fit non-flexible brackets. 
    
    

• Software fee. Today, ecommerce platforms come with licensing costs that range from free through subscription-based to one-time extra spend. What you need to look for here is if the software fee includes everything that you need: hosting, support, maintenance and updates or is it just an empty fee, and you have to buy all those things on top of that. 

Comparison of software fee across different types of ecommerce platforms

5. Operational costs 

Operational costs are rarely taken into account until the platform is implemented. It becomes a problem when expenditure around maintaining the platform and making it ready for the next big drop, new collection or sales season is too high. 

One of the reasons those expenses are easily overlooked is the belief that they should be about the same for every platform. In reality, they are not. With legacy sites like Magento or Salesforce, it’s good to keep a certain amount of extra money ready to invest into it yearly. Otherwise, you would often find yourself compromising on new functionalities or marketing just to fit tens of thousands of dollars for the platform’s maintenance into your budget.

• Maintenance is key and often very expensive. You need to be constantly addressing bug fixes, minor functionality losses and unexpected problems to keep the initial performance. 

• Support. If you have efficient and affordable support it may significantly cut the spending that goes towards maintenance. On the other hand, if your support is not reactive and your ecommerce system is complicated, it may be just multiplying the expenses. 

• Front end updates. You’ll need to contract front end developers in case you want to create a special storefront for a new marketing campaign, or make changes to your main storefront to jump on the new trends. Front end development can be expensive, but it’s worth the investment. While calculating front end update fees, you will come across an unexpected fee – per storefront. Some ecommerce providers limit the free storefronts, so if you’re selling internationally and every country requires a separate storefront, costs can add up significantly. 

The other thing that impacts the expenses of front end development is the complexity of the platform’s technology and approach to development. Headless, API-first platforms are easier for front-end developers to work with, so they spend less time on development, which translates into a lower price of the service. 

• Team operating the platform - Most companies don’t think about what will happen to their ecommerce teams after replatforming. Will they need new specialized employees or new partners? Maybe some positions won’t be necessary?
  Different types of ecommerce platforms require different in-house support or management teams. The expense can also vary considerably. SaaS and headless platforms management is easy and a small sales-focused team can do a wonderful job. Conversely, legacy monolithic platforms require big, specialized teams that are platform-focused.  

  Modern, user-focused, industry-specific ecommerce platforms require less  labor. There are also factors like intuitive product information management (PIM) systems or user-friendly CMS software that additionally make platform management faster and easier. 

• Sale/events/new releases arrangements - Your provider should know about  expected traffic spikes to make sure that your website won’t crash. Sometimes, additional maintenance or services are needed to ensure the stability of the store's performance.

Comparison of operational costs across different types of ecommerce platforms

6. External resources 

Sometimes your in-house team is not enough to complete certain tasks. That is why external resources come in handy. It’s possible to loan, lease or source a resource from another company for a specific task at a specified date and price. For example, hire an auditor to check the performance of your platform. 

This is an individual category of spendings. It’s up to you what services you’ll invest in, what is the scope of platform’s provider responsibilities, and if you choose to use external resources or extend the in-house team.

Those expenses are highly-dependable and it's tempting to assume 20% of the extra budget and not go into details. Unfortunately, external resources are often expensive and you might spend more than 20% of the budget. 

A few things that are worth considering:

• Business analysis or audit. Only through a great understanding of your current situation and the performance of processes and resources, you can draw correct conclusions. Those conclusions will help you shape the idea of what you need from a new ecommerce platform. 
  
  

• SEO consultant. When creating a new page and design, you’re also preparing new content for your website. It’s good to have a specialist on board that will help you make the right choices from the start.
  
  

• External testing agency. Some ecommerce platforms don’t have an extensive QA testing policy, and you’ll need to pay extra for an external QA engineering team.
  
  

• Data migration outsourcing. Ecommerce providers rarely offer data migration services. You’ll need to do it with the help of an in-house team or outsource the project. Ecommerce data migration is time-consuming and expensive.
  
  

• External software development. With legacy monolithic platforms, you would either hire specialized developers or partner with a software company to take care of the maintenance.

7. Research and development

The ecommerce market is still growing. Competition drives the development of new technologies and drills down the costs. Customers’ needs are changing and new generations of shoppers have new expectations that businesses need to analyze. That’s why investing in research and development is crucial to stay on the market. 

You want your store to constantly evolve to fit your customers’ likings. To do so, focus on enhancing your customer experience and adding new features.

Unfortunately, research and development is often underfunded and the first to sacrifice when the budget is getting too tight. The total cost of ownership analysis, if done diligently, prevents those situations. But you still need to include a significant investment into research and development yearly to save your business from stagnation.

One thing that generates the most costs within the research and development category is the lack of agility of the platform. Many ecommerce platforms are the technology of the past. They are often overdeveloped, which leads to problems whenever you want to add a new thing. That means that you’ll rely on a specialized team to work on a simple feature for a long time, and you will end up behind the competition. 

Comparison of research and development costs across different types of ecommerce platforms

8. Platform upgrades

For your website’s performance not to worsen and for your store to be ready for new features, the platform must stay updated. There is a huge gap in the cost of upgrades between different types of ecommerce platforms. It is caused by the amount of money and time required to spend on implementing a new platform version. 

Generic monolithic SaaS or headless platforms are simple and cost-effective when it comes to upgrades. They’re constantly updating in the background. Problems appear rarely and are cheap to fix.

Legacy monolithic platforms are quite the opposite. The new versions are large and packed with code-breaking upgrades. They’re made for any business without a specific industry or features in mind. Upgrades aren’t tested with your set of plugins, so it is necessary to retest your apps and possibly add custom integrations from scratch. It involves extra work and spending at least to maintain the current customer experience. Potential miscommunication between plugins and the new version often causes bugs and worsens the website’s performance. So, prepare for extra spending just to release code updates to fix those issues. It will also lead to a significant slowdown in sales for at least a week because of the emerging problems. 

In summary, the total cost of ownership includes:
- upgrades
- implementation
- extra hours your team will spend re-uploading content
- tests
- code fixes
- staff training sessions
- about extra 20% for unexpected costs connected with the update

All of those factors add up. In case of platform upgrades for enterprise brands, change can take 12 months and cost up to $1,300,000. Smaller companies are spending up to $50,000 yearly on upgrades. 

Often, it’s cheaper to replatform than upgrade a legacy monolithic platform.

Comparison of platform upgrades costs across different types of ecommerce platforms

9. Other costs and unexpected spendings

Sometimes expenses exceed your forecast, even if you’ve done proper due diligence. If you’re not working on the fixed fee, it’s easy to go over budget, especially on complex projects such as Magento or Salesforce (legacy monolithic platforms) or with universal platforms which lack proper functionalities dedicated to your market. This section of TCO will help you foresee other costs that may emerge and estimate a safe margin for unexpected expenses.

• One-time setup fees. In this section you need to evaluate the cost of:
  - marketing necessities (content for your page, initial marketing campaign, new website promotion)
  - configuration payments (server configuration, market segmentation setup)
  -discovery phase costs (detailed workshops to translate a project scoping document into a detailed functional specification and user stories)
  - initial tests (ecommerce SEO audit, UX tests)
  
  Spend some time and adjust the list to your particular needs and the business logic of your industry.
  
  

• You can’t calculate unanticipated expenses. You can include an extra 10 to 20% into the budget for unpredicted issues or additional charges. It seems like a lot, but if you find yourself in between the licensing brackets, you would easily spend those 10% on extra licensing fees. Unexpected expenses are caused by things like:
  - unforeseen integration
  - special training for employees
  - external help with specific unpredicted problems
  - FX markups and more
  
  

• Other costs. Some ecommerce platforms have their own extra payments that are easy to miss. For example, Shopify charges an extra transaction-based fee if your customer uses a payment gateway other than Shopify Payments. Magento, on the other hand, charges extra for shipping support.

The goal of total cost of ownership analysis

When businesses are looking for a new ecommerce platform they’re taking under consideration two factors:

• Whether it meets the requirements

• How much it costs
  
  

More often than not, the second factor can be definitive. Businesses tend to choose the most affordable software by looking at the purchase price. Only to realize that the initially cheaper platform ends up being more expensive because of the additional expenses incurred. To establish which option is the most cost-effective,  you should do a total cost of ownership analysis. 

TCO evaluation provides you with a deep understanding of the platform-related expenses through the first 3-5 years. Many of those initially overlooked costs like hosting, maintenance, upgrades or plugin development can significantly impact the profitability of your business. To avoid strain on your budget and possible replatforming use total cost of ownership analysis to assess the viability of purchases over the long term. Make sure that your new platform will bring you a positive ROI and sky-rocket your business growth.