TCO vs. ROI: what does each metric tell about your project?
To better understand how to use TCO and ROI in your company, we first need to understand what each of these metrics means and what they can tell us about a project.
What is TCO?
TCO, or Total Cost of Ownership, is an asset price metric that helps you understand how much it costs to buy and implement a new resource in your company.
Imagine, for example, that you need to buy a printer. That should be a straightforward enough task, as you can easily compare the printers available on the market and make a sound decision afterward.
But someone might misunderstand the costs of buying said printer if they ignore, for example, how much the ink costs or how often it needs to be changed.
The Total Cost of Ownership is the best metric to use in this situation.
After all, it factors in such hidden costs to make sure you understand how much it really costs to buy a single printer.
It is a big picture metric that considers the value of the asset when you acquire it and how much it will cost over time. Hence the name, Total Cost of Ownership.
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The TCO is composed of the cost of an asset, as well as how much you’ll need to invest to implement, support, update, or recover it in case of failure.
TCO is a great way to determine whether a purchase is a huge benefit for your company or is full of hidden costs that will end up turning a bargain into a financial issue.
If you want to understand the Total Cost of Ownership properly, look into it using the iceberg principle.
An iceberg, much like a project, is made of a part you can see — the top of the iceberg, which is above the water — and a hidden part.
TCO is the right metric to look into if you want to find out the project’s hidden costs and prepare yourself for them.
What is ROI?
On the other hand, the Return on Investment, or ROI, is a much simpler metric to calculate. That’s because it measures performance.
It considers how much you invested in something and what benefits it brought to your company, plain and simple.
To calculate the ROI, we first divide the return of an investment by its cost. Then, we multiply the result by 100 to get a percentage.
We can use this easy-to-calculate metric as a rudimentary way to understand the profitability of an investment, although it often ignores hidden costs.
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Let’s suppose you want to calculate the ROI of that printer we have mentioned. So, you might add to the formula:
- how many items you can print with a cartridge over the printer’s price;
- how many items you can print over the cartridge’ price.
That way, you would get a positive result. However, you won’t be looking at important numbers such as:
- how much it costs to replace a cartridge;
- how much you paid to implement the new printer in the office;
- how often you have to take it to the maintenance team for repairs.
Therefore, the ROI will usually fail to show the buyer some important points. That is why those two metrics work better together.
Which metric is better for Digital Marketing campaigns?
In a value-based strategy, providing your customer with an interactive calculator can help you sell your advantages and make your digital products stand out.
However, to understand whether you’re going to do better with a TCO or with a ROI calculator, ask yourself the following questions:
What do I intend to show my client: that the product has a clear benefit for their business or an added cost that they might forget to consider?
Are my values comparable to the competitors’? What do they show when they want to make a similar statement?
What unit am I using to show the benefits?
Which of those metrics better reflects my value proposition?
If you intend to make your customers see how easy it is to obtain results from your product, the ROI is the way to go.
On the other hand, if you’re trying to show that your solution is the most complete and can meet all your customer’s needs, the TCO might be a better metric.
TCO vs. ROI: how do they compare?
So, to recap, let’s see how TCO and ROI compare:
ROI is the clearer metric — it’s easier to understand and better to use when you are trying to make a sale;
TCO is the more complete metric — it shows upsides and downsides of a digital product concisely;
ROI has its limitations — it’s harder for the customer to compare investments without other information, like the rate of return;
TCO shows straight answers to indirect costs — although it might not be as clear as ROI in showing the benefits of an investment to a company.
TCO and ROI are two important metrics to understand the viability of a project. That is why they make great additions to interactive content and can differentiate your page from your competitors’.
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