TCO - How to think like a Capitalist

There you are standing in the computer store trying to decide between two printers, A and B. Both have the same features, same warranties, same manufacturer and can be expected to last 5 years. The difference? A costs $50 and B $100 and B costs about 1 cent per page to print while A costs 5 cents a page (special paper). Which one should you buy?

Well, you could do "eeny meeny miney moe" or you could employ a capitalist tool called "Total Cost of Ownership" or TCO. This is a good measure of true cost. For example, you print about 10 pages a week or roughly 500 pages a year. So, over the lifetime of the printers, you would be printing 2500 pages. So, A would cost you $50 + 2500 x 5 cents or $175 while B would set you back $100 + 2500 x 1 cent or $125. I guess the cheaper printer would come out more expensive! Of course, if all you do is print one page a week or roughly 250 pages over the 5 year period, the TCO would be $62.50 and $102.50 respectively.

The above example is, of course, extremely simplistic. In real life, you may be comparing completely different technologies or different services with different guarantees etc. You may not even be able to predict your own behavior! But, if you compute TCO consistently, you can get a good feel for the costs and perhaps it would force you to figure out exactly how much you are going to use your new purchase.

So, big deal! Why is it so important? Well, TCO is a tool that we should employ in our daily lives but we don't. For example, many of us do not realize how much that must-have sweater really costs when you carry a balance on your credit card. Similarly, when we buy an inexpensive jacket that lasts just a year or two, we may end up paying a lot more in the long run than buying an expensive but durable jacket.

Another time we should employ TCO is when we are buying a car. We often pay far more attention to the price than to the costs of regular maintenance, fuel, insurance and what the vehicle would fetch when we want to replace it with a newer car.  You will find that the initial cost of the car (the purchase price) gets swamped by these"extras".  Similarly, when you renting or buying a residence, try to figure the costs of heating and cooling.  You will find that a well-insulated house is worth some extra dollars.

Anyways, keep TCO in mind the next time you are shopping for anything or even deciding whether to drive your own car or a rental on a road trip.  The results just might shock you...