Understanding TCO (Total Cost of Ownership)


Understanding TCO (Total Cost of Ownership)

Understanding TCO (Total Cost of Ownership)


Total Cost of Ownership (TCO), you probably heard the importance of it, but perhaps you don’t know specifics and details that falls under this term. 
Here in this article, we will look at what TCO is in details, and we will even explain how you can use this term and how it is composed.


TCO is an abbreviation for Total Cost of Ownership. In other words, it is the analytical approach to money and making customers happy.

TCO means the sum of all the money that a you may spends towards a vehicle during its ownership, such as expenses related to its purchase, having the vehicle repaired and maintained and the cost of its operation, excluding the profit obtained by reselling the vehicle in the end. 



Here, we have three trucks - A, B and C - of similar size. 

Out of these three trucks, which truck do you think you should buy? 

It is difficult to decide even if their specifications and performances are similar to each other. 

Therefore, we need to look at the price and cost details of each which are explained in the below picture.



The price of each vehicle is $5,000, $4,000, and $4,500, respectively.

Which truck will you choose? Based upon pricing, it is a wise decision to select truck B, as it is the cheapest one among the options we have. However, we should consider more than just purchase price when buying a truck. 

But, Running cost plays a big role when purchasing a truck. As trucks are utilized to often operate for long distances, the fuel and repair cost must put into consideration before deciding. 

For example, if you operate the vehicles for five years, the fuel cost for each is $9,000, $10,000, and $8,000, respectively, and the repair cost is $2,000, $3,000, and $2,500, respectively. 

Now which truck is more attractive to you? Doesn’t truck C seem like the best option? Should we buy truck C, then? Maybe not. 

The last matter to consider is the residual value of the vehicle. When purchasing a vehicle, its resale price should be considered. 

Let’s take a look at the resale value of the vehicle that can be expected five years after its purchase. As you can see, the residual value of each vehicle after five years is$3,000, $2,000 and $2,000, respectively. Which truck has the most value? 

When calculating total cost, truck A is deemed to be the most economical. Considering the sum of the total cost during the ownership of a vehicle.