TCO vs CPO
When we first started building online stores, eCommerce was the new kid on the block, and back then plenty of brands were sceptical about what it could achieve. Today it already accounts for over a quarter of all retail sales in the UK, so even the naysayers are now onboard, but there are still mixed opinions on what good looks like when it comes to eCommerce solutions.
Some retailers value site speed and performance above all else, some focus purely on functionality, and others simply want stability, ease of use, and good service. While all of these things should be a given, the metric that really matters is return on investment. You can have the world’s most amazing eCommerce store, but if it isn’t delivering enough profit to drive your online growth, it’s time to shop around.
Right now, you might have a rough idea of your eCommerce ROI based on the monthly fee from your platform provider, but to really know how much bang you’re getting for your buck, you need to calculate the true cost of your online store.
Measuring your total cost of ownership
In our industry, there are two key ways to achieve that. The first method is to look at total cost of ownership (TCO), which involves assessing all expenses associated with owning and operating your online store over its entire lifecycle (usually a three-year period).
As well one-off costs such as the design and build of your store, this should include ongoing fees for hosting, technical support, new features, and monthly licence fees, etc. It should also factor in the hidden costs of running an online store, such as commission charges and onboarding expenses.
Although it takes a bit of work to get the numbers together, TCO gives you a holistic view of financial implications, and makes it a lot easier to compare eCommerce solutions if you’re looking to switch providers.
Identifying your cost per order
The second method is to calculate cost per order (CPO), which means totting up every expense across your eCommerce business for a specific period, and then dividing that total by the number of orders you received during that time.
To break it down even further and get an idea of how much your business makes on a per order basis, you can deduct the CPO from your average order value, which is just your total revenue divided by the number of processed orders. Of course, if your CPO is higher than your average order value, that’s a major red flag. If that’s the case, it’s highly likely that you’re paying too much for either your eCommerce solution, your digital marketing campaigns, your in-house operations, or a combination of all three.
Turning cost metrics into actionable data
So, which is the best measurement for your business? The truth is, they both have value, however realistically you can’t uncover your cost per order without first identifying the total cost of ownership, so that’s where any business should start.
Calculating TCO enables you to understand the financial impact of your full eCommerce setup, which can sometimes be a surprise to retailers who felt like they were getting a great deal at the point of purchase. By unearthing hidden costs your business may be lumbered with and taking a hard look at the efficiency of your eCommerce solution, it’s also a great exercise to spot ways to reduce spend and increase ROI.
CPO shouldn’t be discounted though, as it provides a baseline number that you can work towards improving. If you drill down even further, you can also segment your average CPO by categories or specific product types to understand which areas of your business are the most or least profitable.
What’s more important is what you do with your findings. It’s easy to become complacent about the ongoing charges you, especially if you’re happy with your overall revenue, however if you overlook the true cost of your eCommerce solution you might never unlock the full potential of your online store.
Ready to calculate the TCO of your eCommerce solution? Download a free copy of our practical framework, which helps you work out how much all the different aspects of your store are actually costing you via the form.