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Make sure you understand TCO (total cost of ownership)
20 January 2011, by , in Data Management, Executive, 2 comments

On the Edmunds website is a very slick tool that will allow you to calculate the TCO (total cost of ownership, which they’ve cutely trademarked as true cost to own) for a car you may be considering for purchase. The true cost to own tells you what the car will really cost you once you factor in things like depreciation, interest on your loan, taxes and fees, insurance premiums, fuel costs, maintenance, and repairs.

A similar calculation should be done when comparing the pricing of AMS systems. What I typically do for my clients is calculate the first year investment as well as the total cost of ownership (TCO) over five years. For AMS systems, the initial investment will typically include implementation consulting services, data conversion, and training as services you’ll need during the first year. So the initial investment will be higher than the future year investments.

It’s important to take this into consideration when comparing AMS systems, because often the first year costs for systems can be widely disparate but wind up converging over time.

Here’s an example of what I mean:

  • Product A has a first year cost of $110,000, with an annual cost of $25,000 for years two through five. Over a five year period, the product will cost $210,000.
  • Product B has a first year cost of $51,000, with an annual cost of $48,000 for years two through five. Over a five year period, the product will cost $291,000.
  • So while product B looks like a great deal in year 1 (HALF the price of Product A!) becomes less of a deal by year five.
This is obviously a very simplified example, but the point is that you have to consider the initial cost as well as the five year TCO in order to make fair comparison of systems.
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2 Comments on "Make sure you understand TCO (total cost of ownership)"

Joshua Paul - 20 January 2011 Reply

Wes, excellent point that is often missed or confused! I want to add that this analysis works well when you have identified the 2 or 3 systems that most closely meet your organization's needs and will be able to provide similar levels value to your association. For this reason, the total-cost-of-ownership analysis should occur later in the selection process. Comparing all of the AMS providers using TCO from the start bypasses the important process of finding solutions that fit your association. In the same way you can’t arrive at a meaningful the TCO comparison between a BMW X5 and a Toyota Corolla, a TCO analysis between two strong, but very different, AMS systems like MemberClicks and Aptify would not yield much assistance in your decision making, and could derail or delay the selection process. Since not all systems are the same and not all organizations are the same, the variable that is plays a large part in this equation is value. Associations measure value differently. Some are looking for membership growth or retention; others are after staff-efficiency and cost control; while others place a premium on member-satisfaction and engagement. Just as you do with you clients, Wes, once you have identified a couple systems that provide a similar level of value to that specific organization, then clear TCO figures are critical.

Wes Trochlil - 20 January 2011 Reply

Very good point, Joshua. Comparing TCO implies that you're actually comparing similar products. In the process I typically use with clients, TCO comparison only comes once we've narrowed the choices down to feasible systems.

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