Total Cost of Ownership (TCO)

Here’s lesson #2 around how you can use financial acumen to up your sales game…

Today I’ll be reviewing Total Cost of Ownership (TCO).  Often times when a company is evaluating a purchase decision, they will solely focus on the initial cost of an investment and choose the one that requires the lowest upfront cost.  However, a more sophisticated buyer realizes that this is not the full picture.  In properly evaluating the costs surrounding a project, it is more diligent to consider the initial investment plus any ongoing costs.

In layman’s terms, Total Cost of Ownership (TCO) is the initial purchase price ‘plus’ the additional costs of operation.

One of the most simplistic examples of TCO is when you purchase a new car.  For example purposes only, let’s consider someone looking to purchase a luxury car that’s evaluating a comparable Mercedes and Lexus model.  In comparing the two, they would naturally look at the cost of both- let’s say the Lexus costs $50,000 and the Mercedes costs $45,000.  A less informed buyer would view this at face value and consider the Mercedes cheaper and therefore a better value.  However, the more informed buyer familiar with the total cost of ownership concept would look at the purchase price + average cost of repairs, insurance and fuel.  When evaluating the 2 cars based on TCO- they may actually find that the Lexus is cheaper over time based on the overall cost comparison.

Here are a couple examples based industries you might relate to:

  • Marketing Tech:  What is the initial software cost + support, maintenance and IT / Marketing labor hours to integrate and manage?
  • Tech Infrastructure:  What is the initial cost for the hardware + installation, training, maintenance, upgrades and internal IT to manage and support?

As you can probably tell, TCO is extremely simple to calculate and only requires addition.  Here’s the calculation:

TCO = Purchase Price + Ongoing Costs

The output of the calculation is not only focused on the initial investment requirement, but the total cost over an extended period of time.  Here is an example of a technology purchase, comparing the initial purchase price model to TCO:

  • XYZ Software
    • Initial Purchase Price = $100,000
    • TCO
      • Initial Purchase Price = $100,000
      • Installation Cost = $50,000
      • Annual Maintenance Cost (3 years) = $150,000
      • TCO = $300,000

If you’re not already using TCO as you pitch projects to your customers, I strongly encourage you to start using it.  I’ve found that it can be much more effective when comparing your solution to a competitor, to get to the true overall cost and proving value.  It will ultimately enable your CIO, CMO or CFO sponsor to present a more accurate picture of the costs associated with your project, and help produce a win-win for both you and your customer.

If you have any feedback or success stories using TCO, please share…

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