The total cost of ownership (TCO) is a metric that calculates all of the costs associated with an asset to figure out its total cost over a specific time frame.
Learning the TCO of a product can help you understand what it will cost you overall. You can then use that information to compare products and choose the one that best suits your budget in the short and long term. But how do you calculate TCO and what does it look like in action? Here’s all you need to know.
Definition and Examples of Total Cost of Ownership (TCO)
The total cost of ownership (TCO) is the cost to own an item from the day you buy it to the day you sell it, factoring in all of the related costs.
- Acronym: TOC
For example, if you want to buy a car and are deciding between two different options, the TCO can provide the insight you need to figure out which will cost more, not only today but over an estimated period of ownership. To figure it out, you will need to research all the costs involved with the purchase, including taxes, maintenance, the resale value, and more.
Interestingly, sharing TCO information has been shown to increase the probability that people who drive small or midsize cars will prefer to get a hybrid or battery-electric vehicle in the future.
How Total Cost of Ownership (TCO) Works
When performing a total cost of ownership analysis, you’ll need to identify three key factors: the product, how long you want to own it, and what the various costs of ownership will be.
For example, say you are trying to decide between two new trucks. To figure out which one will be the better deal, you’ll need to estimate how long you plan to keep the vehicle. If you aren’t sure, you can perform the TCO for multiple periods: five, 10, and 15 years, for example. Once you choose your timeframe(s), identify all the cost components you need to consider. For a vehicle, those components include:
- Purchase price: How much you pay to buy the vehicle
- Insurance: The amount you will pay to keep the vehicle insured
- Financing: The interest and fees you will pay to finance the vehicle
- Maintenance: The cost of regular maintenance such as new tires, oil changes, etc.
- Repairs: The average cost of repairs for that vehicle
- Taxes: The taxes you will pay for the vehicle
- Depreciation: The equity you lose as the vehicle’s value decreases
- Registration fees: The fees to keep the vehicle registered
- Tolls and parking: Fees you may need to pay for tolls or parking as part of your normal commute
After researching and figuring out the estimated cost for each of these components over the timeframe(s) you expect to keep the vehicles, you add all the costs together to get your total cost of ownership.
Total Cost of Ownership (TCO) Example
Here’s an example of a TCO comparison for a new 2021 GMC Sierra 1500 Crew Cab Truck and a 2021 Ford F150 SuperCrew Cab XL purchased in Idaho (zip code 83634), according to Kelly Blue Book’s five-year cost-to-own estimation:
|2021 GMC Sierra 1500 Crew Cab Truck||2021 Ford F150 SuperCrew Cab XL|
|Purchase Price (MSRP)||$38,095||$39,545|
|Depreciation (five years)||$19,676||$19,146|
After running this five-year TCO to compare the two new trucks, you can see the Ford is estimated to be a slightly better deal even though the purchase price is higher. However, the difference in TCO may not be big enough to sway your opinion. The bigger the difference between, the more influential it will likely be on your decision.
Estimating the TCO can require a great deal of time and research. However, industry-specific tools exist to streamline the process for you (like the TCO tool by Kelly Blue Book used above).
A vehicle purchase is a good example of using TCO, but TCO can be applied to many different products or services. For example, a business could run TCO calculations for a new computer system or a new piece of construction equipment.
- Total cost of ownership (TCO) estimates how much a purchase will cost you over a specific time frame.
- To determine the TCO, you need to select a product (or products), choose a timeframe, and identify how much the cost components will total over the given period.
- Understanding the TCO before making a purchase can eliminate cost surprises and help you make the best decision for both today and the future.