TCO (Total Cost of Ownership) is the sum of all direct and indirect costs of owning a product, system or service over its useful life. It includes the purchase or subscription price plus setup, training, integration, support, maintenance, upgrades, downtime and eventual replacement or migration.
Why it matters
The cheapest option on the price list is often not the cheapest in practice. Comparing TCO is common when choosing between self-hosted and cloud software, between hardware vendors, or between building and buying. It also reveals hidden costs such as staff time and the price of leaving a vendor.
Example
Three-year comparison of two tools:
Tool A (cheap licence) : licence 3,000 + setup 4,000 + staff time 12,000 = 19,000
Tool B (higher licence) : licence 9,000 + setup 1,000 + staff time 4,000 = 14,000Tool B costs three times as much to license but is cheaper overall.
Common mistakes
- Counting only the invoice and ignoring internal labour.
- Using a short time horizon that favours low upfront cost.
- Leaving out the cost of downtime, security incidents or lock-in.
- Comparing options with inconsistent assumptions about usage.
Related
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