What is total cost of ownership, and how do I work it out?
The purchase price is one of six costs, and often not the largest. The six pots, how to fill them in for a real product, and how to turn the total into a cost per year.
- Difficulty
- beginner
- Time
- 30 min
- Read
- 3 min
Short answer
Add six things over the years you will keep it: purchase, running costs, consumables, servicing and repairs, insurance and licensing, and disposal — then subtract what you can sell it for at the end. Divide by the number of years. That figure, not the ticket price, is what the thing actually costs you, and it regularly reorders a comparison.
Two options with the same price are almost never the same cost. One uses more electricity, one needs a proprietary filter every three months, one has no local service agent, one holds half its value and one holds none. Total cost of ownership is simply the discipline of counting all of it over a stated number of years, and it is the single most useful piece of arithmetic in any purchase comparison.
Step by step
- Decide the ownership period first.Everything else depends on it. Be realistic: how long did the last one last, and how long do you actually intend to keep this one? Use the same period for every option or the comparison is meaningless.
- Pot one: purchase and getting it working.Price, delivery, installation, any adaptation to the space, disposal of the old one, and the accessories you will have to buy immediately. The last two are routinely forgotten and are rarely trivial.
- Pot two: running costs.Energy, fuel, water, connectivity. Use the published consumption figure and your own usage rather than the manufacturer's assumed usage. Multiply by the ownership period, and remember unit prices change.
- Pot three: consumables.Filters, bags, cartridges, blades, descaler, pads. Find the actual replacement interval and the actual price, and check whether the part is proprietary — a consumable only one company sells is a cost decided by them, not by the market.
- Pot four: servicing and repairs.Annual servicing where it applies, an allowance for out-of-warranty repairs, and the cost of a call-out in your area. If spares are unavailable, the honest figure for the first serious fault is the full replacement price.
- Pot five: insurance, licensing and subscriptions.Insurance, road tax, standing charges, a required app subscription, a warranty extension if you genuinely intend to buy one. Anything payable simply because you own the thing goes here.
- Pot six: what it is worth at the end.Subtract the realistic resale or trade-in value, or add the disposal cost if it has none. Two products with identical costs can differ enormously here, and it is the pot people leave out most often.
- Divide the total by the years and compare.Cost per year is the comparable number. Do it for every shortlisted option using the same assumptions, and write the assumptions down next to the answer so you can see what drove it.
Tips
- Where an option's advantage is entirely in one pot, test what happens if that assumption is wrong. If it only wins because energy prices stay high, say so.
- Proprietary consumables and short support periods are the two things that most often turn a cheap purchase into an expensive ownership.
- For anything with a resale market, check completed listings rather than asking prices — those are what things actually sell for.
Common mistakes
- Using different ownership periods for different options — It is the fastest way to reach a wrong answer. Compare over the same years, and if one option genuinely lasts longer, show that through the resale value or a second purchase in the period.
- Using the manufacturer's assumed usage — Published annual running costs assume a standard number of cycles that may be nothing like yours. Recalculate with your own figure.
- Ignoring the cost of the changeover — Removing the old item, adapting the space, taking a day off for delivery and buying new accessories are real costs and they only appear if you look for them.
Questions people ask
Is this worth doing for every purchase?
No. Use it where the running or consumable costs are meaningful relative to the price — appliances, vehicles, heating, anything with a subscription or a filter. For a one-off item with no running cost, the price is the cost.
How do I estimate repairs?
Use the cost of one out-of-warranty repair in the period as a rough allowance, and check locally what a call-out costs. Products with no available spares should be assumed to be unrepairable, which is itself a large cost.