Total cost of ownership (TCO)
The full cost of buying and using something over its whole life, including purchase, running, maintenance and disposal, not just the price.
In short
- The purchase price is often a small share of what an asset or service really costs.
- TCO lets you compare options that are priced differently, such as buying versus leasing.
- Include internal costs like staff time, training and downtime, not only invoices.
TCO = Acquisition costs + Operating costs + Maintenance costs + End-of-life costs − Residual value
Use the same period for every option compared, for example five years. For long periods, discounting future costs gives a fairer comparison.
Total cost of ownership, or TCO, estimates everything a purchase will cost over the period it is used. It is used to compare options fairly when one has a lower price but higher running costs, or when options are structured differently.
What goes into TCO
- Acquisition: purchase price, delivery, installation, setup and implementation.
- Operation: energy, consumables, licences, subscriptions and staff time to run it.
- Maintenance: service contracts, repairs, upgrades and support.
- Downtime and risk: the cost of outages or failures.
- Training and change: getting people to use it.
- End of life: disposal, data migration or exit costs, minus any resale value.
Where it changes decisions
A cheap printer with expensive cartridges, a low-cost software tool that needs a consultant to configure, a vehicle with poor fuel economy: each looks attractive on price and costs more over its life. TCO is standard practice for equipment, fleets, IT systems and outsourcing decisions, and is usually part of scoring in requests for proposal.
TCO relies on estimates. It is worth stating assumptions clearly and testing how sensitive the result is to them.
Worked example
Two forklifts over five years
| Forklift A | Forklift B | |
|---|---|---|
| Purchase | $32,000 | $41,000 |
| Energy (5 years) | $27,500 | $9,000 |
| Maintenance (5 years) | $12,000 | $7,500 |
| Resale value | −$6,000 | −$9,000 |
| TCO | $65,500 | $48,500 |
The electric forklift B costs $9,000 more to buy and $17,000 less to own.