Total cost of ownership in e-commerce - The thing to lookout for

When starting an e-commerce business, it's important to understand the costs beforehand to be able to weigh the risks and determine the return on investment (ROI). Still, many businesses fail to account for the ongoing, realistic costs of ownership for their e-commerce solution, and instead focus entirely on the initial costs.

The ongoing costs associated with the e-commerce site are equally important as the initial costs; those two combined are called the total cost of ownership. TCO is an important metric when planning e-commerce, including everything from the impact on your initial budgeting to the overall ROI over time. Many of these costs can greatly impact your profitability, so make sure to assess the long-term viability of any purchases before making them.

What does Total cost of ownership mean when talking e-commerce?

The total cost of ownership, or TCO, is the costs of an e-commerce platform with the initial costs and the operational costs over 3-5 years combined. It incorporates all initial and ongoing expenses related to the continued development and maintenance of the e-commerce platform, including modules and third-party integrations, and is an accurate method of optimizing your business. 

Sometimes the cheapest software at the purchase price can end up being more expensive because of the additional expenses incurred, but with a TCO analysis beforehand, it's easy to establish which e-commerce option is the most cost-effective. 

Why is TCO important? 

Considering the total cost of ownership early in your e-commerce project can help you avoid strain on the budget and provide you with deeper insights into long-term expenses and risks. It also clarifies the understanding of indirect expenses that often add up during the platform's lifecycle. With a TCO analysis, you can deeper examine the financial impact of the investment, and it's especially suitable for larger projects, such as re-platforming, due to its thorough analysis. Often the operational costs over 3-5 years (which are not included in the initial budget) can make up a majority of the TCO, and not considering them early on in your budget is a mistake.

TCO costs to consider

When calculating the e-commerce TCO, there are two cost areas: initial and ongoing costs. The initial costs – development, plugins, app, integrations, one-off fees – are easier to calculate as they often are the same for all projects. The ongoing costs, however, are not as easy to calculate at the start of a project, but some have more impact than others: 

• Transactions fees

Your platform provider can charge additional transaction fees on top of the monthly service charge, often percentage-based, with costs adding up quickly. Discuss this with your provider and set the details. 

• Support fees

The costs of support are a big reason for pricing volatility. Depending on different factors, such as the channels you use, you may have to use multiple solutions at the same time: chat, phone, or e-mail. 

• Third-party fees

The ongoing costs of payments and licensing concerning your third-party customizations need to be considered as well. It includes your modules and plugins, for example, integrations for your e-mail service, order management, and fraud prevention. 

Total cost of ownerhsip when dug deep

• Infrastructure costs: This includes the cost of hosting the website, purchasing equipment such as servers, and setting up the necessary network infrastructure.

• Development costs: This includes the cost of designing and developing the website, as well as any ongoing development work that may be required.

• Marketing costs: This includes the cost of advertising, SEO, and any other marketing efforts to drive traffic to the website.

• Operations costs: This includes the cost of fulfilling orders, handling customer service inquiries, and managing inventory.

• Payment processing fees: This includes the fees charged by payment gateways and processors for processing transactions.

• Security costs: This includes the cost of implementing and maintaining secure systems to protect customer data and transactions.

• Maintenance costs: This includes the cost of maintaining and updating the website, as well as any necessary hardware and software upgrades.

• Staffing costs: This includes the cost of hiring and training employees, as well as any ongoing salaries and benefits.

Final words about the sweet TCO

You can easily say that running an e-commerce business is more complex than you think. And things will continue to get trickier when your business evolves and get bigger. Small or big, every business will need to keep an eye on what they are about to sign on for, and read all of the fine print.