What is Total Cost of Ownership (TCO)?
For those of you who don’t know what TCO means, let’s give you a quick introduction. Bob explains: “TCO is the cost of implementing and maintaining an e-commerce platform over a given period of time – typically 3 to 5 years. It includes all costs involved in running your online store on the platform: building it, using it, maintaining it, and growing or scaling it - preferably to the moon and back.”
Why is it important to know the TCO of your e-commerce platform?
Having a thorough understanding of what your platform costs is vital for an e-commerce business. Bob: "With a good TCO calculation you suddenly see where the money really goes. This gives you options: knowing what exactly you spend your budget on allows you to start tweaking. It gives you levers to improve your ROI." When your growth is slowing down, for instance, this knowledge can help you to make the adjustments needed to stay healthy. Robert adds: “A TCO calculation also helps you get an idea of how much benefit a tool would need to bring to justify its cost, in terms of impact on conversion, average order value, etcetera.”
For e-commerce brands considering a migration to another platform, knowing the TCO of various platforms and being able to compare them on cost is necessary to make an informed decision. They will have to look beyond purchase price or monthly fee and assess the actual cost of a platform in full. A good TCO calculation will also reveal the hidden costs, things you typically overlook when assessing a platform. Hence, a TCO calculation might prevent some unpleasant surprises further down the road, when you already invested in a platform migration.
→ Want to know more about replatforming to Shopify? Check out our Migration e-book here
Why Code built a TCO calculator
Calculating your TCO is a daunting task, as we understand only too well at Code. Robert reflects: “It’s not a straightforward sum. There are so many variables involved. You need a model to do this right.”
Code started looking into TCO calculation when we heard brands complaining about the cost of Shopify, with its revenue sharing. That got us thinking: in our experience, Shopify is not so costly, it’s just that the costs are distributed differently from other platforms. Bob gives an example: “With Magento (now Adobe Commerce), for instance, you will spend a lot on maintenance, just keeping the platform alive, and you will hardly have resources left to improve your tech stack.” Robert: “Shopify is cheaper, more powerful and a lot more transparent when it comes to future cost. With Shopify you don’t have hidden fees, you know where your investment goes. What’s more, all costs should lead to more revenue. Shopify earns itself back.”
→ Read more about Shopify Plus (and what it costs) here
What should be included in a TCO calculation?
A TCO calculation for e-commerce platforms consists roughly of two categories of cost: the cost of building and outfitting your online store when you first start using it, and the cost of day-to-day operation and upkeep after that.
1. Cost of initial build
This includes all costs made when you first build your store. Basically everything you do before you can launch:
Build your store on the platform
Development, e.g. integrations (PIM, ERP, WMS) and custom-built features
Any one-off fees paid to the platform, third-party apps and extensions
The cost of setting up hosting, servers and other hardware (such as POS hardware) needed to run your store.
2. Cost of day-to-day operation
This includes all costs to do with running your store on the platform. All your recurring costs are here, as well as any one-off investments you decide to make along the way:
Platform fees (e.g. Shopify Plus fee)
Payment processing fees (e.g. Mollie, Shopify Payments)
App fees (e.g. Klaviyo, Gorgias)
Integrations fees (e.g. PIM, ERP, WMS)
Future feature development & shop improvements
Hosting (for non-SaaS platforms)
Platform upgrades and maintenance (for non-SaaS platforms)
Note that some of these costs also lead to more growth for your business. An improved e-commerce stack brings you more revenue and might lower marketing costs, as does email marketing with Klaviyo. In our TCO calculator, the expected growth from these features over the first 3-5 years are also taken into account.
A note on the cost difference between open source and SaaS platforms
As you can see, when you calculate the TCO for non-SaaS platforms (such as Adobe Commerce, Shopware and WooCommerce) you will have to include several things that are absent from the TCO calculation for SaaS platforms like Shopify:
Setting up hosting and servers (including the cost of backup servers)
Platform upgrades and updates, security updates, and platform maintenance
The cost of your Dev Ops team, in-house or agency, needed for server management
The cost of scaling issues, e.g. managing expected (BFCM) and unexpected (sudden hit product) sales peaks
The cost of troubleshooting and crash management
The cost of any overhead to do with platform support (any unexpected errors you need developers for)
If you want to get the complete picture, you should probably also factor in the estimated cost of missed revenue due to crashes and errors.
A note on transaction fees
With any platform, SaaS or non-SaaS, the bulk of your operating costs will be coupled to your revenue - in the form of revenue sharing (in the case of Shopify) and, most importantly, the transaction fees charged by your Payment Service Providers. This means that, with the exact same platform setup, the TCO for a brand with 5 million yearly revenue will be lower than the TCO of a brand doing 50 million a year.
It also means that it pays off to pay close attention to how you set up your transactions. When you use Shopify Plus, for example, you have the following options:
Shopify Payments. The fees for Payments depend on your Shopify plan (Basic, Advanced or Plus): the higher the plan, the lower the percentage charged by Payments. If you use Shopify Payments, Shopify will not charge you an additional platform fee.
Third-party payment providers like Mollie. If you use these, Shopify will charge you a platform fee of 0,25%. Still, using them might be interesting for your situation if you have a lot of negotiation power and can broker a nice deal with a PSP. Often, Shopify Payments rates are higher than those of other PSP’s - which is another reason to keep an eye on your TCO calculation.
Request a personalized TCO calculation
Would you like to receive a full and detailed TCO calculation for your e-commerce brand?
Code has extensive experience with calculating TCO for various platforms like Shopify, Adobe Commerce (Magento), Shopware, Salesforce and BigCommerce. Reach out to Robert Wagner by email if you would like to request a free, personal calculation.