Total Cost of Ownership - Explained
What is the Total Cost of Ownership?
Written by J. Mance Gordon
Updated at April 22nd, 2024
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What is the Total Cost Of Ownership?
The sum of total price of an asset and the operational costs of owning it gives the Total Cost of Ownership (TCO). Asset purchasing decisions should take into account not only the sale price of an asset but also the expenditure that will be required to keep the asset operational. This is the long term cost of an asset and a better measure of the actual price of an asset over time.
How does Total Cost Of Ownership Work?
Investors and companies carefully consider TCO before parting with their funds. These costs are mentioned separately on company expenditures and financial statements. Businesses analyze TCO to gauge the actual price of an asset to balance expenditures and calculate the actual value of business deals. TCO of both direct and indirect purchases is accounted for. A comprehensive analysis of assets and investment TCO can significantly impact the outcome of business transactions.
Example of Total Cost of Ownership in Business Investments
An IT business looking to upgrade to a new server system for its database management needs to consider the TCO of all alternatives available in the market. Some systems might have the most affordable initial purchase price but require excessive expenditure to stay operational for the next few years. While other options might have higher price tags yet require minimal upkeep over the years. Before switching over to the new servers, businesses study the TCO of each option for the next few years and make a purchasing decision that costs less over the long term. On a much smaller scale, individuals should also consider the TCO of a product before purchasing it. A cheap pair of shoes at $20 needs to be repaired every 2 months for $5. The long term cost of owning the shoe for a year adds up to $50. A decent pair of shoes at $45 need no repairs for two years. So the seemingly cheaper option actually has a much higher TCO than a currently expensive option. Another example where careful consideration of TCO saves you a lot of money is in the purchase of a car. A cheap car that requires frequent repairs ends up costing you a pretty penny over time whereas a well made car with a higher sale price might need little in maintenance costs.