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What is the most expensive component in the total cost of ownership (TCO) of ecommerce platforms? In the traditional TCO definition, the combination of solution acquisition and platform licensing fees would be the answer. However, in this article, we argue that the cost of innovation, or the cost of change, is the most expensive TCO component companies must account for when choosing a future-proof platform.
With static platforms, the cost of innovation grows exponentially over the years. A truly adaptable ecommerce platform, on the other hand, is designed to easily adapt to evolving market conditions and business scenarios and helps innovate at predictable costs.
With decades of expertise delivering enterprise-grade ecommerce solutions of any complexity with the Commerce Innovation Platform, the Virto experts compiled a comprehensive guide on how adaptable and static platforms affect cost and how to optimize ecommerce TCO.
The total cost of ownership, or TCO for short, in the IT sector is defined by Gartner as “a comprehensive assessment of information technology (IT) or other costs across enterprise boundaries over time.” Understanding ecommerce TCO helps businesses calculate the return on investment (ROI) and return on time invested (ROTI) of a project.
TCO in ecommerce encompasses all the costs associated with acquiring, implementing, operating, scaling, and innovating with a product or service throughout its life cycle. While platform pricing usually can be easily measured in monetary terms, the TCO metric represents a more complex term.
The total cost of ownership in ecommerce includes not only direct upfronts and ongoing costs but also hidden ongoing costs accumulated over the years of modifying and innovating with an ecommerce solution. These hidden costs or factors are substantial but usually overlooked in a traditional TCO definition, and we’ll talk about them in detail as well.
In most cases described by platform vendors, the total cost of owning and operating a digital commerce solution comes down to the following simplified components:
1. Solution acquisition and implementation costs; and
2. Licensing and IT fees.
Let’s look closer at what’s included in each of them.
The implementation or project costs represent all the costs associated with launching a new ecommerce solution. This includes software development, user experience design, uploading data to the system, integrating third-party providers, onboarding and training employees and potential B2B customers to use a new platform.
In the traditional TCO definition, the costs associated with solution implementation are considered the most significant, and they’re often openly presented by platform vendors or implementation partners.
The major expenditure items in this category include:
Licensing and hosting fees include the ongoing regular costs associated with hosting and owning a copy of the software provided by a vendor. The hosting recurring costs can be paid to the platform vendor, third-party hosting provider, implementation partner, or can be handled in-house in case of on-premises deployment. For cloud solutions, for example, license fees, hosting, and IT operation costs are often merged into a single payment to a vendor.
It is important to note that besides payments to the ecommerce platform vendor and hosting providers, the license costs can include subscription fees for plugins and extended functionality on top of basic features, provided by the platform vendor or third-party vendors. For instance, if a company uses third-party AI-driven services for price personalization or product recommendations, their cost should also be added to the equation.
Typically, when thinking about TCO, businesses focus on the cost of software development or acquisition and project implementation as the main items of expenditure when it comes to ecommerce channels.
In this scenario, where businesses only account for upfront implementation costs and ongoing IT and license fees, the TCO looks as follows.
Following this logic, it may seem the most cost-effective for companies to focus on finding and implementing a solution with the lowest implementation or project cost, license, and IT fees for TCO optimization. eCommerce decision-makers who fall into the trap of such thinking prioritize solutions with the most out-of-the-box features, widgets, plugins, and other elements that promise to reduce implementation costs.
The problem is that, unlike other types of software, digital commerce solutions have one more TCO component that’s often overlooked and not singled out into a separate category in traditional classifications. Moreover, this component may prove to be the most expensive in TCO evaluation. It’s the cost of innovation or the cost of change.
In reality, the total cost of owning, operating, and staying up-to-date and competitive with an ecommerce solution includes the following:
1. Solution acquisition costs (software development, initial integrations with third-party services, data migration, and deployment);
2. Licensing and IT fees (licensing and subscription fees, hosting services, IT maintenance and support); and
3. ‘Hidden’ ongoing cost of innovation (all costs associated with modifying the solution after implementation).
In practice, after launching a digital commerce solution, the demand for it to change increases exponentially. With the constant influx of feedback from both customers and employees, changing market expectations, and evolving competitors, catching up and improving becomes a daily exercise.
We’ve all heard about teams being “agile,” which is, in fact, nothing but gathering feedback and responding to it quickly. Thankfully, in digital commerce, businesses have plenty of data from which to analyze and draw insights. What companies have to do is listen and adapt in response to market feedback.
As long as the platform makes it possible to transform and modify the solution after its launch to meet changing market expectations at a reasonable cost, there is no point in replatforming. However, if a company decides to accept the costs, risks, and pains of replatforming, then it means that adapting a current solution has become too expensive to invest in.
To showcase the difference between platforms that give room for a predictable cost of change and innovations and those that don’t, Virto Commerce coined the terms adaptable and static platforms.
An adaptable platform is architecturally designed to easily adapt to rapidly changing market conditions and business scenarios at predictable costs. More on what makes a platform truly adaptable – in our guide.
If we add an often-overlooked component of the innovation costs to the above TCO estimation over the years, then we will arrive at the realistic TCO for static platforms shown below.
When looking at a realistic yearly cumulative TCO for static platforms, it becomes clear that the project cost should not act as a decisive factor in choosing an ecommerce solution. What really matters is not how much it costs to implement a solution but how expensive it becomes to constantly adapt the platform to meet growing customer expectations.
In fact, the chart above is rather optimistic since it assumes that the cost of innovation grows linearly over years. What we observe with most customers migrating from static platforms is a pattern where the actual rate of innovation dies down over time, and no amount of investments can possible speed up this rate. For enterprises that consider their digital commerce solutions a real competitive advantage, a much faster rate of change is required.
In a static platform, innovation costs grow exponentially. And in reality, very few companies are willing to pay such a price. In general, after about two years of continuous development and improvement of a static solution, management abandons the platform as it becomes obvious that further investment is futile. For a while, a business decides to wait it out, hoping that the situation will improve or resolve on its own. When that doesn’t happen, management finally decides to replatform.
While platform migration seems rational, replacing one static solution with another often leads to a cycle of repeated replatforming — an expensive trap. Switching to a truly flexible ecommerce platform with infinite adaptability breaks this cycle, acting as a major cost-saving measure for enterprises finding themselves at the crossroads. Since adaptable digital commerce platforms are, by definition, designed to maintain a stable cost of innovation, the TCO for such platforms looks as follows.
When looking at a realistic yearly cumulative TCO for static vs. adaptable platforms, it becomes evident that focusing solely on upfront implementation costs and overlooking the long-term expenses of adapting the solution to future business needs is a losing strategy.
If we compare ecommerce TCO calculations for static and adaptable platforms, we will see that, in the long run, the main thing to worry about from a financial perspective is the platform’s adaptability potential and, therefore, the cost of innovation.
Most ecommerce platform vendors recognized by research agencies like Gartner and Forrester, in fact, offer static solutions. Virto’s enterprise-grade Commerce Innovation Platform is one of the very few adaptable digital commerce platforms on the market.
By leveraging the power of PaaS and its proprietary Atomic Architecture™, Virto Commerce can offer unmatched flexibility and customization, allowing enterprises to build and scale ecommerce solutions beyond the limits of traditional SaaS. Whether you set up a classic online store, a B2B portal, or a marketplace model of any complexity, Virto’s truly adaptable Commerce Innovation Platform is the answer to put an end to an expensive trap of repeated replatforming.
Virto Commerce’s team has decades of experience under their belt delivering complex B2B ecommerce solutions for enterprises, including challenging replatforming scenarios. Here are a few tactics for managing ecommerce TCO, as shared by Virto Commerce’s co-founder and COO, Evgeny Grigul, in Forbes.
If you want to adequately manage and optimize your ecommerce investments, consider all components of the total cost of ownership when analyzing costs. Paying attention to what your expenses include is crucial, even if we put aside the cost of innovation.
For example, besides ecommerce platform licenses and hosting, the cost of licenses may include subscription fees for using additional but necessary plugins and extended functionality on top of main features. Moreover, a company may need to purchase plugins from third-party vendors that can add up to a significant portion of license fees.
As for the implementation costs, besides development fees, this expenditure item can also include salaries of non-dedicated employees and more.
It is essential to have a clear distinction between the cost of operations and the cost of innovation. Managing them separately helps businesses prioritize and measure the impact and ROI of innovation more effectively.
For B2B businesses aiming to expand into new markets and explore other models (e.g., B2C, B2B2C), scalability is non-negotiable. Assess your ecommerce needs at the beginning of your platform surfing and throughout your business’s entire ecommerce journey to ensure your platform can easily grow with your business at predictable costs.
When accounting for a significant ecommerce investment, such as launching new digital channels or replacing a legacy ecommerce platform, consider the implementation costs alongside a realistic forecast of operational and innovation expenses for the next few years.
“Adding the operations and innovation costs forecasted for the next two to three years to the implementation cost is essential. This will help ensure that the company has budgeted enough to support the initiative before it begins to pay off.
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The most expensive component of ecommerce TCO is ensuring a high rate of innovation at predictable costs. While adaptable ecommerce platforms are designed for continuous improvements and innovations at predictable costs, static platforms fall short in this crucial task.
Changing a static solution can be many times more expensive than the original project cost and sticking to static platforms can lead to a costly trap of repeated replatforming. Choosing a truly adaptable and flexible ecommerce platform can help companies easily adapt to rapidly changing market conditions and enjoy long-term innovations with transparent TCO over the years.