February 28, 2008, 12:00 AM

SPONSORED SUPPLEMENT: On-Demand Technology: The Gain Without the Pain

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If the response is positive, a thank you is sent along with an incentive to encourage a future purchase or for referring a friend to the site. If the response is negative another message asks what they found to be dissatisfactory. “In a collaborative environment, the vendor supports the retailer’s marketing and operating goals,” Olrich adds.

The cost of ownership

A very important aspect when evaluating a vendor is the actual cost of ownership. This goes beyond the fees charged for usage to include security, maintenance, support, development and implementation costs for new features and functionality. “Most retailers underestimate these costs when weighing the cost of the on-demand model vs. licensing a platform,” says Vcommerce’s Schwegman

Some large retailers can spend as much a 3% to 6% of revenues on IT support costs for licensed software, he adds. Vcommerce bases its pricing on a revenue sharing model in which retailers pay a percentage of the revenue from the total dollar value of the transactions running over the platform. Pricing tiers based on volume enable retailers to decrease their costs as volumes increases.

Figuring the cost of ownership requires retailers to perform a technical deep dive and map out the workflow of the steps involved to process each transaction. “At each step of the process retailers need to ask how a feature or functionality affects the customer experience and how problems are dealt with to ensure a satisfactory customer experience,” says Schwegman. “Drop shipping, for instance, is becoming a popular option with retailers because it enables them to increase their virtual inventory, but it is a complex piece of the order management process that needs to be fully understood before committing to a platform.”

Part of the technical deep dive is to ask vendors to list all the features included in the platform and if the retailer or vendor will need to add technology partners, such as credit card processors. “Determining upfront where a platform begins and ends is the challenge that comes with determining whether they are buying a true end-to-end solution,” Schwegman says.

In many cases, short-term contracts do not work because there are multiple integration points across all sales channels before those objectives are achieved. “Non-IT personnel tend to simplify the complexity of using on-demand platforms to achieve their business objectives,” says Schwegman, who adds retailers can outsource some or all of their platform functionality to Vcommerce. “Our approach is to install in phases, reevaluate, and redeploy as necessary. The worst mistake a retailer can make is to try to do everything all at once. Adding capabilities over time is a more effective approach, especially in a multi-channel environment.”

In 2007, Vcommerce added a full service online marketing services group to support its platform.

The flat-rate alternative

While there is no question the lower cost of ownership of an on-demand platform can help retailers justify such arrangements, some vendors are moving away from revenue sharing models and offering flat rates to create straightforward pricing.

“The goal is to bring transparency to on-demand software because many vendors offer pretty similar services and functionality,” says Venda’s Max. “Flat rate pricing normalizes the cost and delivery of the platform and allows retailers to plan for the actual cost of the platform.”

Under a revenue sharing model retailers can pay from 2% of sales volume to as much as 40%, according to Max. Such fluctuations can be difficult for retailers to digest, because it means their costs are unpredictable.

“Retailers may persuade the provider to bill against more predictable business metrics, such as number of orders or new account registrations or they may insist on a cap in overall fees per billing period,” says Max. “But all of these approaches require non-standard concessions for most providers.”

Venda charges $12,000 per month for its service, plus a fee for its credit card gateway. Contracts typically run three years with options to renew for subsequent one-year periods thereafter. “Signing a contract for a minimum of five years can give vendors too much room to rest on their laurels,” says Max.

Many also recommend that retailers build into their contracts specific requirements for up-time, response time to service requests, and guarantees that give an out if expectations aren’t met. “With these types of contracts, retailers know exactly what they are getting,” Max says.

A last resort

While including an out clause in a contract provides retailers a measure of protection in the event vendors fail to meet expectations, exercising it ought to be an act of last resort. “Exiting a contract before it is fulfilled and switching platforms will disrupt the retailer’s business,” Max says. “It is better to try to work through the problems with the vendor than cut and run. But if it is clear the vendor is not paying attention to the retailer’s needs, then that’s a tough problem to solve.”

As retailers look to shift their focus away from licensed and home grown e-commerce platforms to on-demand platforms that offer standardize features and functionality, knowing the right questions to ask of a prospective vendor is more important than ever.

Leveraging the rich features of on-demand platforms

As retailers increase their adoption of on-demand software they are finding the benefits extend beyond lower operating costs to include delivery of richer features sooner than those that trickle into the market through the traditional software licensing model or that many retailers can afford to build themselves.

Providers of on-demand software, also known as software as a service, are able to deliver richer features faster and more affordably because they work closely with clients to learn their business objectives.

“We take a consultative approach that requires a lot of talking to the client about their business and goals in order to get at the pain points they usually experience,” says Gary Van Roekel, vice president of sales and marketing for Melissa Data Corp., provider of data quality applications.

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