TCO Explained Simply
- TCO (Total Cost of Ownership) is the total cost of owning a product, service, or asset. It includes the initial purchase price and all expenses incurred during its use.
- TCO = Purchase Price + Operating Costs + Maintenance Costs + Disposal Costs
What TCO Means for Small and Growing Businesses
It helps you see the true total costs associated with acquiring and operating any business asset, equipment, or software, not just its purchase price. In addition to the purchase price, it includes all costs throughout its lifecycle, such as operating expenses, maintenance, repairs, and other related expenditures.
- TCO helps compare a cheaper option with a more expensive one that is more beneficial in the long run.
- Many companies get burned by buying a "cheap" solution that later becomes more expensive to operate.
What Total Costs Include
- Acquisition Costs
- Purchase Price
- Shipping, Installation, Setup
- Operating Costs
- Energy, Consumables, Maintenance
- User Training, Staff Time
- Service and Support
- Service Contracts, Repairs, Updates
- Hidden Costs
- Inefficiency, Lost Time, Complexity of Use, Downtime
- Obsolescence and Need for Replacement
- Disposal or Replacement
- Removal, Sale, Recycling, Transition Costs
🛠 What Small and Growing Businesses Need to Know or Do
- Don't just look at the initial purchase price
- When buying equipment, tools, or software, also consider the operating costs (running, maintenance, replacement) over its lifetime
- Ask suppliers about the total costs
- Find out about service terms, training, and costs for expansions or upgrades.
- Consider lifespan and replacement
- For items like computers, cars, and software, plan in advance when they'll need replacement and what that will cost.
- Account for time and labor
- Sometimes a cheaper system requires more manual work or causes delays – which also costs money.
💡 Practical Example
- A company purchases inexpensive employee management software for USD10,000 per year. However:Not in the local language → slows down work
- Lack of support → requires self-service
- Difficult to use → wastes time for both HR and employees