Total cost of ownership and customer value in business markets

Abstract

This paper explores the use of the total cost of ownership (TCO) approach from the business marketing perspective. TCO provides a method to estimate all cost associated with the acquisition, use, and disposal of a good or service over the lifetime of the purchase. Organizational buyers can employ TCO analysis to evaluate alternative offerings from suppliers, to assess ongoing supplier performance, and to drive process improvement. Sellers can use TCO models to measure, document, and communicate the value that their offering represents to a customer in the way of lower costs relative to the next best alternative. TCO analysis can be a powerful selling tool to demonstrate concrete customer value creation for alternatives that deliver comparable benefits. The execution of a TCO analysis requires experts from both the buyer and seller organizations to work closely together in mapping and modeling the target customer's application. Ideally, the sales representative leads the process in which both parties collaborate. The process contributes to the strengthening of trusting, long-term buyer–seller relationships.