It is common to hear the words “price” and “cost” used interchangeably. However, there is a significant difference between the two. “Price” is the sum for which a product is bought and sold. “Cost” is that price plus all direct and indirect costs associated with acquiring, paying for, utilizing, and maintaining a product over its entire lifecycle.
TCO is a concept that speaks to the reality that price is always a part of cost, but cost is not always a part of the price. More than just the dollar amount, TCO incorporates both the value of time, and the amount of work (direct or indirect) needed to acquire and maintain a product or service.
Although foreign to some, integrating the TCO model into your everyday business practices can undoubtedly impact your bottom line. Let’s take a look at another example. We will begin by looking at a price-focused model, using office supplies as the example.
Meet Andrew. Andrew works for a small advertising agency and makes $15 per hour At the beginning of each month, Andrew orders office supplies for the entire agency of 10 people. This month, a total of 6 different items were requested by individuals within the agency.
Andrew begins by selecting four vendors that he will use to research his items. His only goal is secure the best deal on each of the six items that he needs to order.
Andrew spends two hours doing price comparisons for these items at each of the different vendors, and finishes with three different orders, and a savings of $10.
If Andrew makes $15 per hour and only saved the company $10 at the end of a two hour price comparison, did the agency really save money, or lose it?
Andrew’s savings of $10 created three different shipping charges, three separate deliveries, and three separate invoices.
Now, let’s turn our attention to the same scenario using the TCO approach.
Andrew begins by selecting the same four vendors that he will use to research his items. His goal this time is to secure a solid deal, but to not spend a lot of time completing his office supplies order.
Andrew spends 45 minutes doing price comparisons for his six items at each of the vendors, and finishes with one order, and a savings of $5.
Rather than using two hours of his time, incurring a multitude of other charges, and making more work for other departments, Andrew created a single order, with one delivery and one invoice, reducing the agency’s overall costs associated with placing the office supplies order.
Using a TCO approach Andrew saved the agency only $5 on the price of the items, but he also reduced the total cost associated with the purchase by eliminating:
• Labor cost of the time spent on price comparisons
• Shipping charges from the additional suppliers
• Labor costs of the time spent to take delivery from the additional suppliers
• Labor costs for processing the additional invoices
Andrew even put the agency ahead because now Andrew has more time to do other things that help the agency achieve its mission. This is TCO at work. Next time you find yourself searching for the lowest price on an item, consider the total cost of your quest throughout the lifecycle of that product.