Whether companies launch a digital commerce project from the ground up or prepare for ecommerce replatforming, they typically try to estimate the overall cost of such a task.
In fact, the financial aspect greatly affects the choice of a digital commerce platform.
For a new digital solution, buyers look to calculate the total cost of ownership (TCO) and minimize it, if possible. This approach seems reasonable. After all, if a company can accurately estimate what it’s going to cost to work with each prospective platform over the next few years and compare the numbers, then the final decision turns into a trivial mathematical exercise.
So, at first glance, everything looks simple. However, the reverse is true.
What we’re observing is that plenty of companies are looking to change their existing ecommerce platforms. But considering that replatforming is something every company seeks to avoid, there must be a problem somewhere. The sheer volume of the market for digital replatforming is clear evidence that many businesses cannot afford to develop their digital commerce solutions in line with market demands and would rather replatform than continue using their current solutions.
So why do companies continue to spend massive amounts of money replacing platforms?
In one of my previous articles, I explained the root cause of most replatforming projects from the perspectives of both a business owner and IT — the inability of static solutions to keep up with ever-increasing customer expectations.
What if we look at the same problem from a CFO’s point of view? From a financial perspective, it’s the growing cost of innovation that drives companies to change their solutions.
What Does Total Cost of Ownership (TCO) of Digital Commerce Really Include?
In defining TCO, Gartner mentions the following components for IT:
Hardware and software acquisition,
Management and support,
End-user expenses, and
The opportunity cost of downtime, training and other productivity losses.
Most companies I deal with simplify the equation into three components:
Cost to launch a new solution,
License fees, and
Cost of IT operation.
For SaaS solutions, the picture is even simpler: license fees and IT operation are merged into a single payment to a vendor, leaving only two components:
Cost to launch a new solution and
It turns out that once we estimate the cost to launch a new solution and review the vendor price policy, the TCO becomes clear. Now we know exactly how much we’re going to spend on our ecommerce project in the next few years. In an ideal scenario, the TCO will be as follows:
It might seem like what logically follows from the above graph is that companies should focus on finding a solution with the lowest costs to run. Those who fall into the trap of such thinking start looking for solutions with certain out-of-the-box features, widgets, plug-ins, and other elements that promise to reduce implementation costs.
The problem is that, unlike other types of software, digital solutions have one more TCO component that’s often overlooked and not singled out into a separate category in traditional classifications. Moreover, this component might prove to be the most expensive. It is the cost of innovation.
In practice, what happens after launching a digital commerce solution is that the need 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. If that sounds familiar, then it’s because we’ve all heard about being “agile”, which is, in fact, nothing but gathering feedback and responding to it quickly. Thankfully, in digital commerce, we have plenty of data from which to analyze and draw insights. All we have to do is just listen and adapt in response to the market feedback.
As long as you can transform the platform to meet changing market expectations at a reasonable cost, there is no point in changing the platform.
However, if a company decides to accept the costs, risks, and pains of replatforming, then it means that adapting a current solution has become impossible because it’s too expensive.
If we add an often-overlooked component of the innovation costs to the above TCO graph for static platforms, then we’ll arrive at the realistic TCO shown below:
When we look at another graph of real yearly cumulative TCO for static platforms, it becomes clear that the project cost should not be a decisive factor in choosing a 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 innovation costs grow linearly. We usually observe this pattern in static platforms, where the actual rate of innovation dies down over time.
For those companies 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. As a general rule, after about two years of continuous development 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. If once more the choice falls on a static solution, the cycle of suffering will continue. (For more details on why it happens and how to escape the vicious cycle of endless replatforming, see the article on replatforming challenges.)
When Does the Replatforming Trap Happen?
Falling into the replatforming trap is inevitable whenever static solutions are involved. If you want to learn more about the difference between adaptive and static solutions, you’re welcome to look through my earlier piece on the subject. If short on time, below are a few takeaways from the article:
A static platform is a collection of services, scenarios, and integrations that a vendor provides as a monolithic, complete solution.
Such systems are built on the premise that ecommerce is a one-time undertaking that only requires occasional maintenance as opposed to significant, overhauling changes.
Since such systems are designed for a static world where the market rarely changes, altering anything after launch makes no sense.
An adaptive digital commerce platform, on the other hand, is designed for continuous change for as long as possible.
With such a platform, developers are able to constantly and quickly adapt customer experiences to meet changing market realities and buyer expectations.
Adaptive digital commerce platforms allow small teams (1–3 developers) to add new features (e.g., services, integrations, scenarios) every 1–2 sprints for at least 3–5 years. In addition, the speed and cost of development remain stable, manageable, and utterly predictable during the entire platform lifecycle.
What Does the TCO Look Like for Adaptive Platforms?
Since adaptive digital commerce platforms are, by definition, designed to maintain a stable cost of innovation, the TCO for adaptive platforms looks like the following graphic:
So, if we compare TCOs of different platforms, you’ll see that, in the long run, the main thing to worry about from a financial perspective is the platform’s adaptivity and, therefore, the cost of innovation:
This is how one of Virto’s customers describes the company’s experience of continuous innovation with the Virto Commerce digital solution: “For the past three years, we’ve added more than 50 modules and extended our platform without any issues. Whenever our clients ask for new features, we confidently reply ‘yes’, as we know we can do it easily.”
The most expensive problem in digital commerce is ensuring a high rate of innovation at an affordable and predictable cost.
Digital commerce is different from other business applications in that the TCO’s biggest contributor is the cost of innovation. Changing an inadequately chosen solution can be many times more expensive than the original project and thwart any possibility of incorporating innovation quickly. Companies that fall into the ‘static solution’ trap fail to provide the expected customer experience and are doomed to replatform.
The solution is to use adaptive digital commerce platforms, originally designed to easily adapt to rapidly changing market conditions.
You can learn more about adaptive digital commerce platforms and the difference between adaptive and static platforms here.