How Does Total Cost of Ownership Vary Across Ecommerce Solutions?

As operational costs come under the microscope with ever-increasing intensity, margin-squeezed retailers are aggressively scrutinising technology costs.

In this article we’ll explore the subject of “total cost of ownership” (TCO) in the context of modern ecommerce platforms. In particular, we’ll look at the total cost of ownership of Shopify Plus, and why this is such an important point-of-difference when you’re evaluating platforms ahead of a replatform/migration project or launching a new DTC brand.  

What is ecommerce TCO?

In its simplest form, the “total cost of ownership” of an ecommerce function involves adding up the costs of implementing and maintaining a tech stack over a given period of time – typically 3-5 years. This includes the initial up-front costs, plus all expenses associated with maintaining and transacting through the online store.

For a typical mid-sized ecommerce retailer, this may involve some or all of the following (some of which will depend upon the tech stack and chosen approach):

• Platform/solution licence fees (e.g. Shopify Plus subscription)
• Payment processing costs
• Apps and integration licence fees (e.g. CRM, PIM)
• Initial platform implementation costs (e.g. Swanky’s fees), typically including discovery, design, development, QA, UAT and data migration
• ERPs (e.g. NetSuite Enterprise Resource Planning System or Microsoft Dynamics 365)
• Front-end development and (in certain contexts) back-end development
• Middleware licence and implementation costs (e.g. Patchworks)
• CRO testing platform licence costs (e.g. Optimizely)
• Hosting fees and any associated hardware costs (for legacy non-SaaS/Cloud platforms)
• Upgrade costs (for legacy non-SaaS/Cloud platforms)
• In-house ecommerce team
• Third-party advisory and implementation costs, including development and/or CRO retainers with agencies or consultants

Note that marketing costs are generally excluded from a TCO calculation, although they are an integral part of the ecommerce function P&L.

How do you calculate TCO?

For established retailers who have been operating for some time, TCO can be calculated retrospectively with relative ease. Collating your costs from the last three years will give you a quick and relatively accurate picture of what your ecommerce function has cost as an overhead (and, helpfully, can then be cross-referenced against your revenue and margins to help you understand how efficiently you are operating).

For newer brands, or those looking to create forecasts, this will need to be a prospective exercise and you might need to map out various revenue forecasts to calculate your ecommerce TCO for each. Many solutions have payment-processing or usage-based pricing, for example, so the TCO for a $25m GMV brand will be higher than the TCO for a $10m GMV brand using the same tech stack (albeit the former is likely to be much more efficient).

For those with an existing ecommerce tech stack and team, learning how to calculate TCO is an important first step in creating a clearer picture of what you are spending on ecommerce, and crucially, whether you are getting the right ROI from that investment. The conclusion may be that a tech stack audit or discovery exercise into a full platform migration is the appropriate next step.

For ecommerce directors who are considering making changes, understanding TCO is a vital tool in assessing different ecommerce solutions and approaches. It’s also very valuable in helping you build a compelling business case where you’re trying to secure a budget for a replatforming/migration project, or make meaningful changes to your in-house team.

If you’re struggling to calculate TCO of current or prospective ecommerce platforms, please let us know as we are happy to provide guidance with this. 

How does TCO vary between the most popular ecommerce solutions?

At Swanky we work exclusively with retailers building with Shopify, but many of our clients are either migrating from another platform, or have carefully considered alternative solutions. We therefore have a deep understanding of the reasons why brands typically replatform to Shopify Plus.

In very broad brush terms, there are three categories of ecommerce solutions for established retailers to consider:

1. Hosted legacy solutions like Adobe Commerce Cloud (Magento), SAP Commerce Cloud, WooCommerce and Salesforce Commerce Cloud
2. SaaS solutions like Shopify and BigCommerce
3. Headless solutions like commercetools, Fabric and Elastic Path.

TCO varies very significantly between these three groups.

Without going into great detail on the differences between each solution, the hosted solutions are typically associated with very high TCO and a number of specific pain points which have enabled the SaaS solutions to build dominant market share. For example, Swanky has to date supported around 40 retailers with replatforming from Magento to Shopify Plus, where from a TCO perspective they are no longer required to pay for hosting, platform updates or large development retainers focused purely on maintaining functionality and fixing bugs.

Salesforce Commerce Cloud and SAP Commerce Cloud are notoriously expensive; whilst five years ago they held very significant market share in the enterprise market, the landscape has changed very rapidly. A $20m GMV ecommerce retailer building on Salesforce Commerce Cloud is likely to have a TCO which is 100-200% higher than if they were using Shopify Plus.

SaaS solutions typically have relatively low entry and maintenance costs, with similarly accessible third-party app and solution ecosystems. Platform fees are usually linked to payment volumes processed, which on the one hand can make forecasting a little more difficult, but which mitigate against sudden cost increases when a revenue threshold is breached (another frustration retailers have with the hosted legacy solutions).

The headless solutions have a very strong marketing message around TCO, again targeting the likes of Salesforce Commerce Cloud but also differentiating themselves from the hosted SaaS solutions and their revenue-based pricing models. Ultimately this will be a question of perspective; implementing commercetools will be significantly more expensive than Shopify Plus for all but the very largest of retailers (and even that use-case is tempered by the introduction of Commerce Components by Shopify). This reflects both core subscription costs but also the significantly higher implementation and development costs needed to run a pure composable/headless store. Complexity inevitably brings cost.

Consideration also needs to be given to the nature of the composable stack selected; whilst a core tenet of composable commerce is that you can select the best-in-breed solutions for each element of your ecommerce stack, this is likely to result in a significantly higher overall cost. For this reason many headless implementations are built on Shopify Plus rather than a more expensive platform (particularly where the brand already has experience using Shopify but wants to explore more expansive front-end options). You can read a full exploration of how to build composable architectures on Shopify in our CTO’s Guide to Composable Commerce and Headless Technologies on Shopify.

Ultimately we can only speak of our experience, which is that of the dozens of brands we’ve replatformed to Shopify Plus from hosted legacy solutions (and indeed bespoke/headless stores), all have acknowledged Shopify’s lower TCO as one of the reasons for the move alongside performance, functionality and access to the wider Shopify app and third-party ecosystem.

For brands transacting between $20m and $50m annually, the TCO of Shopify Plus is usually 10-25% lower than on BigCommerce and 20-75% lower than any of the other solutions listed above.

Ultimately there’s a reason for Shopify’s ubiquity in this market, and the combination of product quality and value is central to that, making previously inaccessible enterprise technology available to the mid-market (and making it better in the process). 

How can ecommerce TCO be reduced?

TCO calculations tend to reveal one or more of the following three areas where TCO can be reduced and the ecommerce function of the business can be made more efficient:

1. Ecommerce platform
2. Plugins and apps
3. People

A lot of our work involves replatforming retailers from legacy platforms to Shopify Plus. Whilst there are implementation fees involved with this, the time-to-value realisation can be very rapid. Many of our clients are able to offset the costs of a platform migration within 12 months or less.

We’ve also been doing a growing number of tech stack audits, evaluating a retailer’s existing app/SaaS configuration and identifying ways to improve (and potentially streamline) it. Examples of where this has helped reduce TCO include removing apps with duplicate functionality, identifying where premium solutions are required and where free/basic subscriptions are equally as performant, and providing further training and optimisation to ensure that growth-oriented elements of the tech stack are driving revenue appropriately.

There are various ways in which people-costs contribute to TCO. We’ve worked with some brands who wanted to reduce the size of expensive in-house teams by leveraging Swanky as a more flexible external team. Other times we’ve supported clients in building their own in-house teams, reducing TCO by minimising external development costs and engaging us instead to provide higher-ROI activities like CRO and growth strategy. Ultimately you need to have the right in-house and third-party resources, with appropriate expertise and gearing to help you scale whilst protecting your margins.

Economic headwinds are accelerating TCO-positive change

After many years of expansive growth, where revenue and YoY performance were prioritised, many retailers are doubling down on their TCO in an effort to protect margins. For some retailers, this move is existential. For others, it will unlock margin that helps them to continue growing despite more challenging market conditions.

Unless you’re locked into multi-year contracts, the imperative for brands on expensive legacy ecommerce platforms is to move quickly (with as little risk as possible) to a leading SaaS solution. With implementation periods being as little as 3-6 months plus any legal, commercial and procurement timelines, the time-to-value equation of a Shopify Plus migration is extremely attractive.

Whilst challenging economic headwinds are a concern for us all, they compel us to focus on the things within our control, and to ensure that our businesses are as lean and fighting-fit as possible. Trading successfully with high TCO is almost impossible in the current climate. Conversely, there is a huge opportunity for brands to move quickly to reduce overheads and increase performance, positioning themselves for growth in challenging markets and explosive growth thereafter. 

To discuss any of the themes in this article with us, including ecommerce TCO and migrations to Shopify Plus, reach out to our team today.