In this article, you will learn:
What total cost of ownership is
How total cost of ownership relates to software procurement
How to approach a total cost of ownership calculation
The benefits of using total cost of ownership when choosing new software
If you’ve ever rescued a dog, you’re aware that the nominal adoption fee is only the beginning. Your new family member will require food, shelter, veterinary care, mental and physical exercise, boarding, grooming, training, and more ‘til death do you part.
Just as dog owners know the adoption fee doesn’t accurately reflect how much it will truly cost to care for a new furry family member, many businesses seeking a new software solution have learned that the sticker price is often the first investment.
According to Capterra’s 2025 Tech Trends Survey, 48% of retailers surveyed reported regretting one or more software purchases made within the past 18 months. One of the main reasons listed for this buyer’s remorse: “The total investment was more expensive than expected.”
For buyers of software in the supply chain industry, understanding the total cost of ownership (TCO) is key to making smart buying decisions that will deliver the best return on investment.
What Is Total Cost of Ownership?
In the business world, TCO provides an estimate of the indirect and direct costs a business will incur when procuring a new product or service. It does this by providing a sum of the purchase price and the ongoing, long-term financial and personnel costs the asset will require over its entire lifecycle.
Software procurement is only one type of purchase where TCO is commonly calculated. Businesses can conduct TCO analyses for other investments, as well.
Because TCO is such a comprehensive concept, it’s helpful to break it down into the following more manageable cost categories: personnel, acquisition, implementation, and maintenance.
Personnel Costs
Even the best software needs human oversight and support. Your team may need to consider hiring people to provide:
Software management (e.g., Who’s in charge of championing this software?)
General IT support
Strategic planning to help you get the most out of your investment
Acquisition Costs
Acquisition costs cover what it takes to find and purchase a particular software. This category includes things like:
Research to identify and define a business need deserving of a software solution
Exploratory design to determine functionality requirements
Software purchase price (could be a one-time fee or an ongoing subscription)
New hardware or updates to existing hardware needed for the software to function
Licensing fees
Implementation Costs
Implementation costs cover what it takes to get a new software solution up and running. This category includes things like:
Installation of the software (including downtime costs)
Training and onboarding for your team
Integration with any existing software systems
Data migration to the new software
Customization so the software fits your team’s specific needs
Maintenance Costs
Maintenance costs cover what it takes to keep your shiny new software running and scaling with your business over time. This category includes things like:
Ongoing user support
Security subscriptions
Cloud storage fees
Preventive and corrective software maintenance
Upgrades as your business and/or team grows
New licensing fees
More training
New hardware
Utilities (e.g., energy use, internet needs)
Total Cost of Ownership Calculation
Unfortunately, TCO calculations are complicated and highly variable. Because each business and software is unique, the formula is fairly vague and requires a lot of fill-in-the-blank (or in the case of the formula below, fill-in-the-ellipsis) work.
A paper by Maan Shami and Adel Marghalani published in the International Journal of Management and Commerce Innovations offers the following high-level formula:
TCO = P + Current Value of (O + T + R.U + E +…)
In which:
P = Procurement costs
O = Operational costs
T = Training costs
R.U = Repairs and upgrade costs
E = Environment costs (e.g., utilities)
... = Any other costs you need to consider
One of the most difficult aspects of calculating the TCO is that so many of the variables are subject to change. But while it may not be an exact science, it remains a critical step in assessing the potential ROI of a software solution. The best software providers will be upfront in helping you understand TCO before you commit.
It’s important to note that TCO isn’t the only dollar amount that matters. When looking into software designed to save you money, these benefits should be factored into the overall ROI.
What Are the Benefits of Calculating Total Cost of Ownership?
The hard, messy work of calculating TCO is not in vain. Here’s what you stand to gain by engaging in the process:
Less buyer’s remorse. Remember the Capterra stat above? The purchase price doesn’t typically reflect what it takes to implement and maintain new software. Calculating TCO and incorporating it into the overall ROI can help avoid costly surprises (and associated regrets) down the road.
More transparency in your decision-making. Calculating TCO isn’t a solitary endeavor. And because it’s such an extensive process, you (and everyone involved in its calculation) will have a much better understanding of what you need and what your solution provides by the time you make a purchase. It all adds up to better team buy-in and decision-making.
Next Steps
If you’re contemplating purchasing a software solution for your business, use the personnel, acquisition, implementation, and maintenance cost categories above to guide conversations with your team and with prospective software vendors. Create a checklist or even a chart for tracking what you learn so you can more easily plug numbers into your TCO formula.
Incorporate TCO into ROI discussions to help guide which software solution will be the best functional and financial fit for your team.
Interested in Learning More About Software Solutions From SPS?
If you want a partner in finding a software solution that’s the best functional and financial fit for your business, SPS is here to help. We have options for every step of the supply chain that will support where you are now and scale with you as you grow.
And importantly, we have proven ROI — 360% in three years.
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