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How To Calculate Total Cost Of Ownership For Enterprise Software (2024)

How To Calculate Total Cost Of Ownership For Enterprise Software (2024)

Choosing what makes up your enterprise tech stack is one of the most important decisions your enterprise will ever face. For one, the platform you pick should scale with your business for years to come. Being locked into one you quickly outgrow (or never gets you off the ground) can be extremely costly. And no tech leader wants to be limited to one specific type of software architecture. This would mean hiring developers with very specific skill sets; it’s quite costly, and if you wind up migrating three to five years down the line, what do you do with those specialists? 

In navigating such decisions, the big picture concept to understand is called total cost of ownership.

If you were shopping for a house, you wouldn’t make your choice based solely off the list price. Is there a roof you’ll need to pay to replace soon? How energy efficient is the house? Is the house big enough to grow with your family, or will you probably be back on the housing market before long? 

All this goes to show that your purchasing decision is best informed by a holistic approach that takes into account future costs (alongside your own personal needs). Picking an enterprise ecommerce platform for your business is very much the same, and that’s where total cost of ownership comes into play. 

Learning to calculate total cost of ownership (TCO) will help you evaluate platforms beyond initial setup and implementation costs—taking into account annual fees, maintenance, third party services, and more. 

Shopify’s TCO calculator can help your business save money right away. In this article, we’ll show you how plugging a few basic data points into our calculator can unlock significant savings potential right before your eyes. 

In this article, we’ll show you how to use our TCO calculator to find the right approach for your business. 

What is total cost of ownership?

Total cost of ownership is composed of one-time costs like implementation and setup, plus recurring costs such as platform fees and tech stack costs, as well as operational and support costs. 

The formula to calculate TCO

Here’s a handy rundown of what to consider when calculating TCO: 

  • Gross merchandise value: How much are you making from B2C sales annually? 

  • Current ecommerce platform: How much in fees are you paying for the main ecommerce platform you’re currently using? 

  • Current annual recurring ecommerce costs: This includes recurring platform licensing and third-party/ecommerce stack fees, as well as ongoing operational and support costs. 

  • Platform and ecommerce stack costs (total annual): These are recurring costs and include any payments made to your current platform for core services and non-core services, in addition to third-party application/software providers that support the enterprise’s ecommerce stack, either directly or indirectly. 

  • Platform licensing fees: Fees paid to your platform provider for core ecommerce platform functionality (e.g., licensing fees, account fees).

  • Projected time horizon: The time horizon that your total cost of ownership should be calculated on (default five years). 

  • Operating margin: Your organization’s operating margin. 

Three total cost of ownership elements

Total cost of ownership breaks down into three primary drivers: 

  1. Implementation and setup costs

  2. Platform fees and ecommerce stack costs

  3. Operational and support costs

Let’s dig into each of them in more detail: 

1. Implementation and setup costs

Ecommerce platform implementation requires upfront investment to set up the systems, integrate the platform to existing enterprise applications, and develop the front end and back end of the ecommerce website. This could be done in-house or with partners—all of which add to an enterprise’s overall implementation costs.

Implementation and setup costs are incurred when configuring the ecommerce platform and can be broken down into five main costs: front-end design, front-end implementation, back-end implementation, system and setup, and data migration. Here is an explanation of each: 

  • Front-end design: Setting up an ecommerce platform requires investments associated with the front-end web and mobile design of the ecommerce platform. Examples include digital marketing and branding for UX/UI design and third-party vendors that help with the front-end design. 

  • Front-end implementation: Next, the final front-end designs for web and mobile are transferred for development and build-out, incurring costs from development headcount and resources needed. Examples include front-end engineering costs, back-end engineering costs (user-facing components), and third-party vendors for implementation. 

  • Back-end implementation: In addition to the front end, the platform needs to be configured for the functionalities to work (e.g., number of stores), as well as integrated with other systems, applications, and plugins like ERPs, CRMs, loyalty programs, and so on. Back-end implementation includes back-end engineering costs, IT team overhead, project management overhead, and testing and QA support. 

  • System and setup: Some platforms charge one-time fees charged by the ecommerce platform vendor for implementation (initial payment for licensing the platform). This cost may include both production and non-production support. 

  • Data migration: Other costs associated with implementation include data migration, especially for enterprises that are replatforming and need to migrate existing data to ensure business continues as usual. The cost of data migration can include loss of revenue from platform downtime, alongside other quantifiable business impacts and disruptions.

A couple other notes on implementation and setup costs:

  • Complex front-end and back-end integration customization needs can result in higher implementation costs and timelines, especially with platforms that have limited functionalities and require additional external applications.

  • Platforms that are more complex require additional implementation support resources (e.g., internal resources, external agencies), which may drive up implementation costs. 

2. Platform fees and ecommerce stack costs

All ecommerce platforms users incur platform fees, which are ongoing costs required to continuously use their vendor platform, typically dependent on their gross merchandise value (GMV). Additional third-party applications may be needed to form a full ecommerce stack, which will drive the cost up for enterprises. 

Platform fees are composed of four categories, inclusive of general platform fees, payment processing fees, and other wraparound costs such as platform support and add-ons. Here they are in more detail: 

  • Fixed and variable platform and licensing fees: Platforms usually charge an overall fixed cost for the ecommerce SaaS solution—monthly or annual fee, as well as variable fees—either based on number of transactions, stores, orders, APIs, and so on. Examples include:

    • Fixed monthly/annual platform fee

    • Variable transaction fee (as a percentage of transaction)

    • Variable fee charged based on number of storefronts, price books, or as a percentage of GMV, or more. 

  • Payment processing and gateway: There are fees associated with processing transactions and the transfer of funds between the buyer and the merchant. Some platforms have their own capability, and some require external providers, which entail fees paid to the vendor and a separate fee to the payment processing provider. 

  • Platform service and support: Platforms support premium support costs and can be a percentage of platform fees or a fixed fee. Examples include:

    • Platform maintenance and technical support

    • Dedicated account management 

    • Third–party platform support agencies

  • Apps, plugins, and integration: Finally, there are additional costs incurred from non-core products and services which provide additional capability, offered by third parties or by the commerce platform vendor. Examples include: 

    • Email marketing services (like Klaviyo)

    • Order management (like Manhattan, Kibo Commerce)

    • Search and SEO (like Algolia)

    • Automaton tools (like Zapier)

    • Loyalty programs (like Voucherify)

    • Product information management (like Akeneo)

3. Operational and support costs

Operational and support costs are recurring expenses that enterprises incur to keep the platform live and functional, driven by the technical resources required, as well as the necessary human resources needed to maintain and enhance the ecommerce platform.

Operational and support costs are composed of four main categories: 

  • Platform enhancements and applications

  • Production and non-production platform management

  • Infrastructure costs

  • Platform ops and administration

Operational costs differ across platforms, with some platforms requiring additional infrastructure costs such as hosting, security, SSL, and so on. Such costs further increase as organizations need scalable computing and security infrastructure to manage a large volume of transactions. 

Enhancements and maintenance drive the need for specialized in-house talent or partners that provide ongoing support services, which drive operational and support cost up. 

More than a cost-benefit analysis—a revenue impact analysis 

Once you’ve calculated TCO, it’s important to analyze what you’ve learned, within the context of your own enterprise. Know exactly what your business is looking for, so you can evaluate staying versus switching, based on your current situation and what you’re looking to do in the future. 

Here are the useful questions to ask of your platform: 

  • Does the platform decrease total cost of ownership? Is it both top line and bottom line? 

  • Does the platform increase or decrease your speed and agility to market?

  • Does the platform lock the business into an architecture or contract with the vendor? Will it be a strategic partner for decades or until the end of the contact?

  • Does the platform support an infrastructure for innovation? How much or how little optionality is offered? 

  • Can the platform match the scale of your business needs? 

  • How much of the industry does the platform support already? 

  • How does the platform invest in R&D? Does it appear on Gartner’s Magic Quadrant™? 

  • How many out-of-the-box capabilities do you need? How does it integrate with other platforms? 

Crucial tools for crucial decisions 

Total cost of ownership is a pivotal tool for managing your enterprise’s budgeting and ecommerce needs. When applied to choosing an ecommerce platform, it can guide you through some of the most important decisions your enterprise will face. Our data shows that Shopify outperforms the competition when it comes to total cost of ownership, both in terms of lower maintenance and licensing costs, as well as higher conversation rates and average order value. 

FAQ on total cost of ownership

How do you calculate the cost of ownership?

You can calculate total cost of ownership by starting with the initial purchase price, and then adding on all additional costs of operation—such as platform fees, tech stack costs, and operational and support costs—from across the platform’s lifespan.

What is an example of TCO?

Total cost of ownership could entail calculating the implementation and setup costs of an ecommerce platform, then adding on all fees and stack costs and recurring operational or support costs over the timespan you expect to use it. Using this figure as a guide, the company could then evaluate the pros and cons of purchasing this ecommerce platform in relation to their own needs and other options in the marketplace. 

What are the three costs of ownership?

The three costs of ownership are implementation and setup costs, platform fees and ecommerce stack costs, and operational and support costs. 

Why is TCO important?

Total cost of ownership is important because it gives you a multifaceted, holistic calculation of how much a platform will cost you across a period of time. The better you understand total cost—beyond initial investment—the more accurately you can budget your enterprise’s future needs. 

This article originally appeared on Shopify Plus and is available here for further discovery.
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