Total Cost of Ownership - TCO


If you are making a major purchase you need to look at the Total Cost of Ownership (TCO). Instead of just comparing the purchase price of two similar items and buying the item with the lower price tag look at what the costs will be over time. When buying a car look at the maintenance costs, gasoline mileage, insurance rates and potential resale value. This gives a better understanding of the true cost of each vehicle.


Once you have identified the relevant costs it is usually easy to derive a dollar amount enabling you to compare the two products. For complex products there are soft costs that need to be evaluated. How many hours of training will your staff need before they can effectively use the new product.  Remember to include lost staff productivity while they are in class.


Will the product be unusable at times due to regular maintenance or emergency repairs? Will this effect employee output. What value do you put on staff productivity? Will this product have any impact on your customers? Will they purchase more of your product if you purchase product A over product B?


Examining TCO is useful when purchasing a product but is also important when you are producing a product. Every aspect of your product or service should be examined for ways to reduce the TCO for your customer. A company’s income is directly tied to the value the customer receives. The greater the value to the customer the more the company can charge. If a large portion of that value is eaten up by additional costs such as training or lower productivity, the less the customer is willing to pay for the product. The lower the TCO for the customer the more room there is for profits to the producing company.


The best way to reduce the total cost of ownership is to constantly get feedback from the customer. Too often this is left out altogether. Even in progressive companies it is a low priority. For example customer training is considered a success if the trainer covered all the material in the allotted time. Rarely is any measurement done to see if the customer understood the material. A test at the end of the training is useful but it is more important to measure if the customer uses the product the way intended by the designers. In a software product examining page hits and keystrokes can show areas of ineffective training.


Reducing TCO to the customer also benefits the company producing the product. Not only will there be fewer calls to tech support but there will be higher client retention and more referrals.


A corporate culture needs to be developed to reduce customer costs. The product developers must work closely with the trainers, technical support people and the sales staff. Since so few companies concentrate on TCO your company gains a competitive advantage. Product features can easily be copied but good corporate culture can lead to an outstanding company.

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