(the answer is taken from http://www.RetailInteractive.ca– a division of Industry Canada)
Retail Hero: When considering the purchase of an information system for your store, you will want to think of it in terms of an investment. The average retailer currently spends anywhere from 1%-2% of sales on information technology, systems and supplies (Based on benchmark survey by PricewaterhouseCoopers LLP and RETAILTECH, April 2000) The useful life of most computer hardware is five years, and in the case of printers, about three to four years. Software can have a much longer life, so it is reasonable to use five as an average useful life for the total retail system (i.e., depreciate it over five years).
It is worth noting that retail lags far behind other industries in terms of spending on technology, at an average of 7.8% of sales over all industries. Given the speed of change in technology, it is recommended that retailers spend between 2% and 3% of sales on information technology, systems, and supplies.
The following example shows you how to calculate a budget for a retail system, including hardware, software, training and implementation, and personnel costs.
Example of How to Calculate a Retail System Budget
A. Retailer's Annual Sales $2,000,000
B. Estimate of the average life span of the entire retail information system 5 years
C. Estimate of the percentage of sales the average retailer spends on information technology 2% = 2/100 = 0.02
Retail System Budget = A x B x C = $2,000,000 x 5 x 0.02 =$200,000
To summarize, in this example, the retailer would have a total budget of $200,000 to spend on information technology over a five-year period.
How to allocate your information technology budget?
Ideally, you will want to allocate 70% of your information technology budget on the computer system, and 30% on training, implementation, and ongoing maintenance. The 70% allocation on the computer system might be further split with 50% being spent on hardware and 20% on software.
The following example shows you how you might allocate your retail system budget as a percentage of your total information technology investment over a five-year period.
Example of How to Allocate Your Retail System Budget
- Total Retail System Budget 100% $200,000
- Hardware 50% $100,000
- Software 20% $40,000
- Training & Implementation 20% $40,000
- Supplies & Upgrades 10% $20,000
It is worth noting that you may have the opportunity to rent software (and hardware) from an Application Service Provider (ASP). You will be charged an up-front set-up fee and ongoing monthly fees. You might also save costs because you may not need someone internally to maintain your retail system.
Although cost is indeed a factor in selecting your retail system, make sure you focus on functionality first. The system must fit your requirements.