Maximizing profit margins: Understanding total cost of ownership (TCO) in eCommerce platforms

May 8, 2024 by
Frank Calviño

By Màrius Rossell Rovira - In the fast-paced world of eCommerce, selecting the right platform is crucial for business success. But it's not just about the initial investment; understanding the Total Cost of Ownership (TCO) is key to optimizing profit margins. 

What is the TCO?

The Total Cost of Ownership (TCO) represents the complete cost associated with owning and maintaining an eCommerce platform over its lifecycle. It encompasses not only the initial purchase or subscription fees but also ongoing expenses like maintenance, upgrades, support, and training.

The basic formula is represented as simple as this: TCO = (cost/GMV) x 100.

The TCO is a percentage that, the lower the number, the better it is for your business. “Cost” is the sum of all the costs and expenses of implementing and maintaining your eCommerce solution that we will see in the following points. And “GMV” (Gross Merchandising Value) is the turnover without taxes, returns, shipping and other items.

Which are the costs that you must consider when calculating the TCO?

To calculate the TCO, we will divide the costs into two categories: the initial costs (CapEx) and the maintenance costs (OpEx)

Initial costs: Within the initial costs, there are four subcategories.

  1. eCommerce software prices: The licensing prices of eCommerce platforms vary according to the pricing model adopted. Here's a quick overview of some common options:
  • Software License: Monthly fee for usage with maintenance and update services.
  • Commission or Revenue Share: Fee based on a percentage of generated revenues.
  • Pay-per-Use: Monthly fee for software consumption or processed transactions.
  • One-time License: Single payment for full access over a specified period.
  1. Implementation costs: Implementation costs refer to the fees paid to an agency for customizing and implementing the solution to meet the unique needs of the company.
  2. Integration costs: When setting up your eCommerce platform, it's crucial to consider the costs of integrating third-party applications like ERP, CRM, PIM or WMS.
  3. Unexpected costs: Unexpected costs are a reality in any project and are often challenging to estimate due to their unpredictable nature. Therefore, it's important to include a contingency margin of between 10% and 20% in the budget to account for potential additional expenses. These expenses may include unforeseen integrations, new requirements due to a change or extension of the project scope, special training or external support, among others.

Maintenance costs: referring to expenses encountered on the platform post-implementation, encompass infrastructure, upkeep, support, and commissions.

  1. Infrastructure costs: Infrastructure costs typically encompass hosting and security expenses.
  • Hosting costs: Monthly fees covering hardware and software maintenance, server bandwidth, and support for on-premises or hosted solutions.
  • Security costs: Vital for website launch, including server protection through Firewalls, intrusion detection, malicious bot prevention, and SSL certificates.
  1. Maintenance: Software upkeep is crucial for ongoing business management, involving initial investment and expenses for updates, enhancements, and bug fixes to ensure operational efficiency.
  2. Support: Costs vary based on service packages and support channels like email, phone, or chat. The quality of support can impact pricing, with options for emergency assistance having higher costs.
  3. Commissions: Most of the eCommerce platforms may charge commissions and fixed fees per sale, affecting profit margins. For some businesses, these commissions are a small price to pay for the convenience that an eCommerce platform offers. However, for other businesses, commissions can be a factor that makes it difficult to make a profit because it directly attacks the margin.

The importance of the eCommerce software when calculating the TCO

Calculating the Total Cost of Ownership (TCO) for an eCommerce business hinges significantly on selecting the right eCommerce software solution. In a market filled with options, Software as a Service (SaaS) solutions is the preferred choice for many businesses since it offers scalability, flexibility, and lower upfront costs, making it a compelling option for businesses looking to streamline operations and reduce TCO.

LogiCommerce, the headless eCommerce platform with 25 years of experience, offers a comprehensive and cost-effective SaaS solution for both B2B and B2C businesses. The platform provides a user-friendly interface, responsive 24x7 support, worldwide scalable infrastructure with robust security, and easy integrations with third-party systems. Together with these advantages, LogiCommerce maintains a transparent pricing policy with no hidden fees and all costs openly detailed on their website.Would you like to know more about the TCO on eCommerce platforms? Download this eBook now for free!

Màrius Rossell Rovira - CEO at TRILOGI - The eCommerce Agency | LOGICOMMERCE - The Headless eCommerce Platform

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