What Is Total Cost of Ownership?

What Is Total Cost of Ownership?

Let me explain what Total Cost of Ownership, or TCO, really means. It's the purchase price of an asset plus all the ongoing costs of operating it. When you assess TCO, you're looking at the overall value of that product over time.

When you're deciding between options in a purchase, you might focus on the short-term price, which is just the upfront cost. But I advise you to consider the long-term price too—that's the total cost of ownership. This includes all the costs and expenses during the product's useful life and even its disposal. Often, the item with the lower TCO turns out to be the better value in the end.

Key Takeaways on TCO

TCO includes the purchase price of an asset plus its operating costs over the entire lifespan. It's a method to evaluate the long-term value of a purchase for a company or an individual. Corporations use TCO to analyze business deals, and individuals apply it to potential buys as well.

How Total Cost of Ownership Works

Companies and individuals factor in TCO when buying assets or investing in capital projects. For businesses, the purchase cost, operations, and maintenance are typically listed separately on financial statements—the purchase as a capital expenditure and the rest as operating expenses. A full TCO analysis is standard practice for businesses.

Over the long term, companies use TCO as a framework to evaluate deals. It takes a holistic view, assessing the purchase from a broad perspective that includes the initial price and all direct and indirect expenses. Direct expenses are straightforward to report, but companies often dig deeper into potential indirect expenses that could sway the decision to proceed with a purchase.

Remember, TCO examines the cost of owning an asset long-term by considering both its purchase price and operational costs.

Example of Total Cost of Ownership

Suppose a company is thinking about investing in a new computer system. The initial purchase price is obvious, but TCO also accounts for software costs, installation and transition expenses, employee training, security and disaster recovery, ongoing support and maintenance, and future upgrades. This full picture helps determine if the system's long-term benefits justify its total costs.

For individuals, TCO applies similarly. Take a car's purchase price plus costs like repairs, fuel, and insurance—that's its TCO.

How to Use Total Cost of Ownership

Buying a car is a prime example where TCO comparison is essential. It's not just the purchase price; include expenses from use, such as repairs, insurance, and fuel.

TCO analysis is particularly useful when comparing a used car to a new one. A used car might seem like a bargain, but its TCO could be higher if it needs frequent repairs, while a new car might have a warranty covering those costs for three years.

In the auto industry, resources like Kelley Blue Book provide TCO details for various vehicles, covering expenses such as fuel, insurance, repairs, and depreciation.

What Types of Costs Should Be Considered in TCO?

The components of TCO vary by item, but always start with the initial purchase price, then add operating costs, ongoing maintenance, any required training, and the expected lifespan before replacement.

What Kinds of Purchases Benefit From a TCO Analysis?

You should consider TCO before any purchase, especially major ones. This includes cars, homes, and other big buys. For businesses, apply TCO to new technology or equipment needed for operations.

What Resources Are Available to Help Determine TCO?

Any source on operating costs can help. Consumer Reports is useful for items like technology and automobiles. For cars, check Kelley Blue Book and Edmunds.

The Bottom Line

TCO is a key factor for both businesses and individuals. When making a major purchase, don't fixate on the upfront price—factor in long-term costs like maintenance, repairs, and energy use. A solid TCO analysis ensures you're making an informed choice, whether for a business investment or personal buy.