Understand How to Calculate and Manage ECommerce TCO

Running an ecommerce business attracts ownership costs, which can vary significantly based on your industry. Ecommerce ownership costs may also depend on other microenvironments, such as your clientele’s geographical distribution and supplier frequency.  

To stay on top of your company’s ownership expenses, it’s imperative to familiarize yourself with the concept of total ownership cost. This way, you can determine whether a business asset still presents any economic or strategic significance.  

Read below as we unpack ecommerce's total cost of ownership and how to calculate it. 

What Is Ecommerce TCO? 

TCO is an abbreviation used in the corporate and entrepreneurial sectors, which stands for total cost of ownership. It refers to the total cost a business incurs in possessing a product or service over its lifetime. Ecommerce tco includes both direct and indirect costs associated with an inventory or item of merchandise during its life cycle.  

Unknown to many ecommerce traders, there’s a cost of ownership attached to every business asset. That’s regardless if it’s decades-old equipment or day-old inventory.  

Why Is Ecommerce TCO Important? 

Understanding the total ownership cost is critical in determining whether a business asset is worth purchasing or not.  

For instance, you’ve opted to buy a piece of equipment for $1,000 instead of another brand that costs $1,200. If both devices have a similar life expectancy, then their final TCO would be calculated primarily based on the differences in their initial purchase price. That would make the $1,000 equipment a worthier investment in the long run.  

However, it could happen that the first equipment model was discontinued along the way, posing severe challenges in acquiring its spare parts. This might compound its maintenance and repair costs, making the second equipment the more economical option.  

The concept of TCO is also important in assessing whether a piece of business equipment is worth disposing of. Naturally, you’d want to replace a frequently malfunctioning machine if the cumulative repair costs threaten to exceed the price of a brand-new one. 

Illustrating Ecommerce TCO 

You operate an ecommerce food truck company. While the business is relatively flourishing, one of your trucks has developed a penchant for breaking down every few miles, racking up significant repair costs each time.  

As a shrewd business person, you may sell the truck if the repair costs result in substantial revenue dips.  

But wait a minute! Before offering the truck up for sale, other equally critical factors must be considered.  

For instance, if the vehicle has undergone remarkable depreciation, the proceeds might not be sufficient to purchase a brand-new truck even after significant top-ups. Besides, the time lost looking for a replacement truck may result in costly downtimes as your loyal customers turn to your competitors.  

Therefore, it would be prudent to have all your facts right to make a sound decision for your ecommerce business. 

How to Calculate Ecommerce TCO 

The formula for calculating ecommerce TCO is; TCO = I + O + M + RC + D + P + T - RV, where; 

I = Initial purchase price, 

O = Operational cost, 

M = Maintenance cost, 

RC = Repair Cost, 

D = Downtime cost, 

P = Production cost, 

T = Training cost, and  

RV = Remaining value.  

The values are further expounded as follows. 

• Initial purchase price – The upfront cost of owning an asset or inventory, including its actual buying price and shipping and installation fees.  

• Operational cost – The expenses your ecommerce business incurs when using an asset, such as fuel costs. 

• Maintenance cost – Expenses involved in keeping a piece of equipment functional over a given duration, particularly servicing costs. 

• Repair cost – Expenses involved in repairing a machine or appliance when it malfunctions, as opposed to the cost of regular servicing. 

• Downtime cost – Revenue losses incurred from when a piece of equipment breaks down to when its full functionality is restored.  

• Production cost – Costs associated with using an item in the production process. 

• Training cost – Costs of training new employees to safely use a business machine.   

• Remaining value – The net depreciation.  

How to Minimize Ecommerce TCO 

1. Conduct due diligence before making a business purchase 

Research widely and compare different dealers and distributors to settle on the most affordable. This is necessary before restocking your ecommerce store or acquiring new business equipment.  

2. Undertake scheduled maintenance 

Routine maintenance is a proactive intervention to frequent appliance breakdowns. By servicing your business equipment regularly, you can avoid the often-exorbitant repair costs. 

3. Read the fine print before subscribing to a service 

Operating an ecommerce company typically requires investing in multiple software solutions to streamline processes like data storage and invoice management.  

Read every software package carefully before subscribing to it, to ensure you’re only paying for what your business truly needs. 

4. Automate where possible 

You can lower your ecommerce TCO significantly by automating certain repetitive tasks using artificial intelligence (AI). 

For instance, you could use AI in ecommerce for virtual assistance, predictive maintenance, and revenue projections. This minimizes overall TCO by reducing the overreliance on human personnel.  

Wrap Up 

Staying on top of your e-commerce’s total cost of ownership is integral to tracking the company’s overall production cost and operating expenses. TCO lets you figure out whether it’s best to dispose of or hold on to an asset.  

Hopefully, this article gave you the insights you need to calculate and reduce the total cost of ownership in your ecommerce venture.