Ecommerce Cost Model Master class

In the sixth video of my ecommerce replatform masterclass series, I give practical advice and insights on how to build a realistic cost model for your ecommerce platform, taking into account the upfront and ongoing operational costs.

[Learning time: 4 mins 50 sec]

 

Video transcript

Hello and welcome to part six of this 10 part masterclass series on running an ecommerce replatforming. We’re going to be talking about building a total cost of ownership cost model for your project.

So first of all why do we need to build a TCO?

It’s absolutely important to understand how much the platform is going to cost, not just initially upfront to build but also over its lifetime. So what is going to be the ongoing Capex and OPEX costs? How does that change as you scale the business? So as you grow from a few hundred thousand to £ millions, into tens, to hundreds of millions. What does that do to your cost base?

Really, really important because you can then start to plot out the cost of platform as a percentage of your GMV, your gross merchandise value, to look at what the relative proportion of cost is to the business. Something that your finance team will really welcome because it gives them greater transparency of costs and how costs change over time.

So the first thing we need to do is year one you need to build out your initial build costs. So that means you need to split out costs for discovery. Discovery is that series of workshops and deep dive from turning a high level scope and MVP business critical requirement definition into a fully fledged functional specification to be signed off for the business. So that’s building out user stories, use case models et cetera.

I recommend splitting that and getting people you are going to potentially work with to allocate a budget so that you can understand how that is separate to the actual build cost. You can work with vendors to get a good understanding of what an approximate build cost should be, based on the scope of your project. Once you’ve got that you then need to look at in year one what are the upfront fees you need to pay in terms of platform licenses. So do you have to pay an initial license fee to get the license, so you can start running development servers? Do you need to pay additional license fees every year? Or is the license in perpetuity? Then there’s just an ongoing support contract. Understanding how that license fee works year one and onwards is very important.

Then hosting, depending on the platform you chose you may have to pay additional hosting fees. So some platforms are fully hosted, have Cloud and non Cloud versions. But you are essentially paying for a platform and all of the application infrastructure, you don’t have to sort out a separate hosting agreement. A good example is Sales Force Commerce Cloud. Other platforms however you either need to sort out hosting, or pay for their hosted version. So there are different options in terms of where the hosting fees get covered, either directly within the application fee you’re paying. Or whether you need a separate contract for that. So really important to tease that and understand how that changes over time as you grow as well.

Then you need to look at support and maintenance, as every platform needs to be maintained. Code degrades, releases happen, and you need to have regression testing to make sure the platform isn’t disadvantaged by any new upgrades or releases. So you need to define what those costs will be and what a typical SLA is for the size of business that you’ve got. Look at how that works on a monthly and an annual basis, and how that scales as you grow the business.

You need to consider the efficiencies of platforms where actually the core application support is already done for you. For example Sales Source Commerce Cloud, you are paying a percentage of your GMV and that covers critical applications support. Others you don’t, you have to pay for that support separate to the core license of the platform.

Then you need to allocate a budget for ongoing development. So business as usual enhancements, little site tweaks, the kind of day to day stuff where you want to enhance the wish list and add this particular bit of incremental functionality. Versus critical strategic projects, such as you’re going to integrate with a new ERP in two years time. Therefore you want to allocate an estimated budget for what that would cost based on using the platform. When you’re doing your platform evaluation and short listing, you can speak to the vendors and get indicative costs for how much it is to roll out significant projects versus little day to day tweaks.

Something that’s often forgotten is third party tools. So based on the platform you’re choosing, what additional third party tools will you need to give you the operational capability that you want as a business. Then look and speak to those third party tool providers to find out what licensing costs or costs as a proportion of traffic/revenue will you need to pay. Then you can model that from year one onwards.

I typically recommend you build your TCO model out over a three to five year period. Because you can very quickly see the difference in the platforms by something might look really cheap upfront but over the total cost of five years becomes much more expensive, even at times prohibitive. I’ve worked on a project where 3rd party tool costs blew the cost model for one platform and made the more expensive license fee model better value for money.

Hopefully that’s given you good insight into how you can approach and structure your cost analysis.

Thanks very much for listening.

 

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If you have any questions, or would like to discuss how I can support your ecommerce replatform project, please contact James today or say hello on Twitter or LinkedIn.