Calculation of TCO (Total Cost of Ownership) in E-Commerce

Total Cost of Ownership (TCO) is a financial concept that helps businesses and consumers evaluate all direct and indirect costs of goods and services associated with the purchase and use of a product or service throughout its consumption cycle.

In the context of e-commerce, calculating TCO is essential for determining a product's true profitability, beyond its selling price. This includes costs such as logistics, storage, platform fees, after-sales service, taxes, returns, and maintenance.

In a perfectly competitive market, with products or commodities of the same characteristics and specifications, the purchasing decision rests exclusively with the bidder who quotes the lowest price. However, in most cases, the lowest price offered is insufficient for decision-making, as there are hidden costs due to the fact that the goods and services are different, or the bid design contemplates different scopes than what is specified in the procurement requirements of the document. These differences, between the specification of the need and the offer, mean that the analysis of what is included in the price is broken down into an analysis that measures all the impacts on the organization's costs in the future once the purchase is made.

TCO analysis was created by the Gartner Group in 1987 and has since become the main concept for making purchasing decisions.

The TCO concept takes into account:

• Direct costs, which are common, such as consumables (energy, materials, etc.), rent, technical service, licenses, etc.

• Indirect costs , which are hidden costs such as the training of resources to use the good, administrative costs, maintenance costs, disposal of the product at the end of its life cycle, or necessary infrastructure. All of these costs are added to the price quoted by the supplier in the bid.

A typical example could be the decision to purchase a car, where from the sale price, you must add taxes, insurance, fuel consumption according to the service required, maintenance such as services under warranty, lubrication, basic spare parts (tires, filters, batteries, which are changed at the manufacturer's recommendation after certain kilometers traveled), and depreciation value and residual price of the vehicle at the end of the time that will be given to the asset.

The TCO structure defines an Acquisition cost and a Post-Acquisition cost to be analyzed and subsequently analyzed in a comparison of offers.

For acquisition costs, we must consider, in the case of a good, its price, transportation, tariffs, insurance, taxes (depending on whether it is a local or imported purchase), and in the case of a service, the amount of services and materials covered by the price. Post-acquisition costs include the costs of consumables, maintenance, services, disposal or resale, decommissioning, potential legal impacts due to termination, fines for noncompliance, failure rate, monitoring, level of depreciation or durability of the asset, treatment of the seniority of the affected personnel in the case of a service or their union status, costs associated with storage (required packaging, conditions of the space where it will be located, etc.).

As we see in the example, the Pick Up Model “A” is initially more expensive than its competitor “B”, but the cycle of use that will be given to the asset, the TCO has a difference of approximately 1000 USD, in such a way that the purchasing decision will have a strong component of the qualitative considerations of the brand of the vehicle, and the results of the tests that the products received where issues of safety, quality or equipment will weigh.

To calculate the TCO of a product sold on an e-commerce platform, we must consider the following costs:

• Product Acquisition Cost, the purchase price from the supplier or bidder

• Logistics and Shipping Costs

• Storage costs (Fulfillment) or a 3PL (Third-Party Logistics)

• Ecommerce Platform Commissions

• Taxes and Fees, VAT, import taxes, payment fees

• Returns and Losses. Some products have high return rates (e.g., clothing, electronics).

• Support and Guarantees, and the time offered

• Type of invoice offered (A, B or C to differentiate VAT)

It is important to consider the cost throughout the useful life of the product, since the costs that not only impact the price paid at the time of acquisition, but also the need to maintain and operate a product throughout that time, and the decision when to renew or change the good or service .

Shopping on e-commerce platforms offers certain advantages when comparing the cost-effectiveness of certain goods:

• Reduction of Acquisition Costs (Initial Cost), offering competitive prices by not having intermediaries

• Discounts and promotions through coupons, memberships, or loyalty programs can lower the initial cost.

• Quick price comparison, making it easier to find the best deal and reducing the risk of overpayment

• Free or subsidized shipping for minimum purchases

• Hidden shipping costs, if free shipping isn't available, can increase the total cost of ownership, especially for international purchases (tariffs, taxes).

• Free returns and warranties from platforms with flexible policies (e.g., Amazon, Mercado Libre) reduce the risk of additional costs due to defective products.

• 24/7 online support reduces troubleshooting costs compared to traditional channels (e.g., less time wasted on calls or store visits).

• Replacement costs or a slow or complex return policy can increase TCO due to downtime or reprocessing.

• Access to manuals and digital resources to download free online documentation, reducing training and technical support costs.

• Automatic subscriptions or updates: Some products (e.g., software) include automatic renewals.

• Reviews and advice are very important and add transparency to the purchasing process. Having other buyers' opinions available helps you choose better-quality products, reducing costs due to early failures.

• Personalization that can be offered by platforms that allow products to be configured (e.g., PCs), optimizing the TCO by avoiding paying for unnecessary functions.

• Fraud or security. Purchasing on unsecured platforms can result in costs due to data theft or counterfeit products. Users should first research which platforms are the most secure or where hacking incidents have occurred.

• Inventory availability: E-commerce purchases avoid travel costs to physical stores, but inaccurate inventory can lead to cancellations, delays, or opportunity costs.