What is Total Cost of Ownership?

The total cost of ownership (TCO) is an analysis and projection tool that helps businesses or individuals determine how much it costs to acquire, operate, and maintain an item throughout its useful lifetime. Typically, the projection is used for a piece of equipment, but could apply to a number of different areas. Pet owners may even use it to determine the cost of owning a pet through the course of its projected life. The total cost is likely to be very different from the initial price of the object.

In heavy industry, the total cost of ownership is a very important component when considering pieces of industrial equipment. Often, heavy equipment may need regular maintenance, and repair parts may need to be custom made. That means the costs associated with that piece of equipment are going to be higher, and may even increase at a faster rate as the equipment nears the end of its useful life. An analysis determining the TCO may be very important to determine if the production benefit outweighs the expenditure.

In some cases, the total cost may help a business determine whether it is better off leasing or buying equipment. For example, some lease agreements may come with discounted service agreements that make the total cost of ownership less. If that is the case, the analysis will reveal that leasing could be cheaper than buying, allowing the company to discard concerns about the end of the product's life. It can simply get a new piece of equipment on a lease or through a purchase when the time comes.

Even in industries where heavy equipment is not being used, a total cost of ownership study has the potential to be beneficial. In an office environment, buying information technology equipment or setting up a network will have a certain initial cost. The costs will be much higher after an analysis of lifetime expenses, especially if an individual is hired to provide that support. In such cases, the business may use a TCO to help determine what types of computers and networks are the most cost effective.

Although the total cost most often applies to business decisions, it can also play a role in personal budgeting or financing. For example, there is a difference in the initial cost of buying a pet or a car and maintaining them for the rest of their lives. Once those lifetime costs are considered, the initial acquisition costs may be a secondary matter. Unlike businesses that are expecting to receive a return on investment, individuals and families may make decisions for more personal reasons.