Definition
Total cost of ownership (TCO) is an estimate of the expenses related to a product, such as MarTech infrastructure and its related services. This cost can include purchasing, implementing, launching, using, supporting, and retiring the product.
The value of looking at TCO is that it takes into account more than an initial investment or outlay of capital, and looks at the bigger picture, and the long-term efficiency that the product can impact. There are other benefits of looking at total cost of ownership, which we’ll discuss below.
Identifying Hidden Costs
In many cases, businesses make decisions based only on the purchase price of a product or service without considering the hidden costs associated with it. Hidden costs can include maintenance, repair, disposal costs, and other maintenance expenses. Conducting a TCO analysis can help businesses identify these hidden costs and make more informed decisions.
For example, if you are looking to buy a new printer, you might find a low-cost model that seems like a good deal compared to other options. However, when you factor in the cost of ink cartridges, paper, and ongoing maintenance, the TCO of the low-cost printer may be higher than a more expensive model with lower ink and maintenance costs.
Other Benefits of TCO Analysis
In addition to identifying hidden costs, a Total Cost of Ownership analysis can help businesses in other ways. Some of the benefits include:
- Better Evaluation of Suppliers and Vendors: A TCO analysis can help businesses evaluate suppliers and vendors better by comparing their prices, service levels, and overall value.
- Identifying Areas for Cost Reduction: Once you identify the hidden costs, businesses can work to reduce them, resulting in better margins and profits.
- Improved Product Performance: By considering the total cost of ownership while designing and manufacturing the product, businesses can focus on improving the product’s performance, reducing maintenance costs, and retuning the product’s overall value.
Conducting a Total Cost of Ownership Analysis
To conduct a Total Cost of Ownership analysis, businesses need to gather various inputs and data. Some of the key data points required for a TCO analysis include the following:
- Purchase Price
- Maintenance Costs
- Installation Costs
- Operational Costs (e.g., Electricity, Fuel, and Water)
- Repair Costs
- Training Costs
- Disposal Costs
By analyzing the above data points accurately, businesses can calculate the total cost of ownership and compare different products’ and services’ total cost of ownership.
Total Cost of Ownership analysis considers all expenses associated with the product or service, including the hidden ones, giving businesses a better picture of the long-term value of their purchase.
By conducting a TCO analysis, businesses can identify hidden costs, make better supplier/vendor evaluations, reduce expenses in specific areas, and improve the product’s overall value and performance.
Related
- Customer Lifetime Value (CLV)
- Return on Ad Spend (ROAS)
- Average Order Value (AOV)
Products
Resources
House of the Customer (2023) by Greg Kihlström
