Negotiating a Make vs. Buy when a retailer wants to build a Personalization engine for their eCommerce business

Posted on December 26, 2016 by


Ok. The title was a geared to help in SEO, but the points in this article are applicable to any Make vs. Buy decision when it comes to online retailers and buying technology.

As on online retailer, your goal is to try and ensure customers have great shopping experience. Some of the biggest challenges in retail is figuring out what to have in stock, inventory, pricing, supply chain, marketing and branding. That is the retail component. The online in retail is a channel and technology enables you to deliver a similar shopping experience in that channel. So should you build the online component or buy to enable shopping for customers who choose your digital channel? While there are many parts of the online channel like the platform, pricing tools, payment gateways, recommendations, site performance, Personalization etc., Lets go over some areas that will help you decide this make vs. buy decision.

What is you core competency?

The best way we have figured our core competency at Tagalys in make vs. buy decision, is asking ourselves if we had to sell out (not that we plan to), will that negotiation be hit if that component in technology was not part our our internal IP. So while the engine is always developed inhouse, we sometimes outsource aspects like the UI for our dashboard, charting, connectors etc., that we considered fairly commoditized So, as a retailer and you had to an offer to sell your company, how much will your offer reduce if you did not build the Personalization engine?

Do you have a different expectation for Personalization?

Personalization engines from Certona, Celebros, Tagalys etc., all run on different algorithms. Some tuned for speed, some tuned for increased personal relevance, some for both etc., If you were to build the same inhouse, are you trying to solve a different problem that cannot be already solved by existing players.

What is the 5 year return on investment?

If you choose to build and invest the money inhouse, will the ROI ((Revenue Generated/Monthly cost) * 60) be more that an external vendor. Lets assume you gather a great team and within a month build a product that generates equivalent revenue that one of these world class products. Will the cost to acquire the team, monthly salaries, churn (employees leaving and hiring new employees), server costs and adding new members to continue innovating be lower that the cost to buy the same over Period X

How long (pERIOD x) will it take to build a world class personalization engine?

When we define time to build, we are talking about the time from Day 0 when this engine can generate the same conversion rate of product views to impressions. That is how you measure if your engine is working at scale, by looking at this metric and not purely on the customer conversion rate. While we were liberal to assume it can be built in a month, truth is it absolutely cannot. With more resources time can reduce, but you need to also consider a learning curve and churn.

What is the opportunity cost of making inhouse?

This is the biggest variable that is not considered by retailers who choose to build inhouse. While cost is easy to assume assuming no churn and soft costs, it is almost impossible to quantify the revenue lost or left on the table during the period X when a retailer is building this product inhouse. And this lost revenue should also be multiplied by the internal rate of return (IRR) that is relevant to this company.

I have been fortunate to sit on the other side (Buyer) of the table in my previous avatar at Deloitte and my previous company, where I always negotiated to get the best value for my client and business. Hence it is important, to look at value through a Total Cost of Ownership lens vs. short term Cost/Price lens.

 

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