Today I’ll wear my CIO hat as we discuss a very important tool you should always use when making purchasing or outsourcing decisions. Understanding the Total Cost of Ownership (TCO) calculation for your next website design, managed services agreement, or even a decision to purchase or lease equipment will help you determine the right strategy for your business, and save you time and money in the long-run. As we go through our example, watch how we can use this calculation to reveal strategies to improve our bottom line.
Simplified, TCO is calculated by identifying and accounting for all of the costs and savings associated with a business decision. For the small business owner, the most commonly overlooked resource in this calculation is the owner’s time. This is a resource that is not usually in the vendor’s proposal. And, remember, TCO is more than an accounting tool – it can reveal new strategies.
Websites. We’ll use website design as a basis for our example. This is an interesting topic, since companies can (and do) spend anywhere from nothing to tens of thousands of dollars for the design and deployment of an online presence. Remember, websites are not technologies. They are marketing strategies (tools) that rely on technology. There is a difference. So, with any marketing strategy, there are costs and benefits – both hard (i.e. financial / time) and soft (i.e. image / brand). These must be identified and incorporated into your TCO calculation.
If you are using a free or fill-in-the-blanks website hosting company, how are your marketing needs being addressed? If there is a disconnect between the website and your strategy, your hidden costs could rise – in lost customers and/or time.
Copywriting. One of the most important, and often overlooked facets of good website design. Good copywriting doesn’t really cost that much. The lack of a good copywriter can have grave consequences on your brand. Spend the money and include this into your TCO calculation.
Time. This is really the most significant cost for small business owners – especially those using DIY sites. How many hours might you spend creating a free website? Ten? Fifteen? Now, how much is your time worth? $50 per hour? If so, you just spent between $500 and $750 designing your “free” website. Plus, you lost nearly two days calling customers. These factors impact your TCO.
Cost savings. One of the original uses of a website was the distribution of static materials – i.e. brochures, etc. Don’t forget to use this age-old feature to reduce your printing and distribution costs. It’s easy to get caught up in the excitement of Web 2.0, and forget some of the original time and money saving benefits of the Internet. Electronic documents save time and money. Evaluate your printing costs, and factor this into your total cost of ownership.
Self-service. Are you using your website to maximize customer service? Many customers expect basic questions to be answered online via FAQs or user forums. How much time can you save if you customer is able to access their answer 24-7? Consider the cost/benefit of using 3rd party chat systems to field your sales and first-line support calls.
Point of Sale. Not every small business can conduct transactions online. Can you? Should you? Factor these benefits (and associated costs) into your TCO. These days, there are almost no barriers to entry for those wishing to incorporate online payment systems.
Depending your business, there could be dozens of costs and benefits related to your online marketing systems (website, SEO, traffic acquisition, et al). Without an expanded view of how the decision affects your business model, you may make a decision to buy or not to buy solely based on the price tag.
The purpose of this discussion was not necessarily designed to uproot all of the financial benefits and expenses of a website. The goal was to get us thinking beyond the basic accounting of the business decision and identify the peripheral strategies.
In today’s economy, we don’t want to spend any more money than we need to. At the same time, we cannot afford to leave opportunity (strategy) on the table because we don’t really understand the true benefits and costs of ownership.
Feel free to contact me if you have any questions about calculating Total Cost of Ownership for a specific project or purchase in your business.
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