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Why Total Cost of Ownership Is Flawed

In a PricingBrew Journal guide, Analytics or Optimization…Which Do You Need?, the author puts forth an idea that really got me thinking…

You know how software and technology is often evaluated and compared on the basis of Total Cost of Ownership? Where the direct and indirect costs of acquiring and operating the technology are projected over its useful life, and then used to evaluate and compare alternative investments?

When evaluating two very different sorts of technology investments—such as pricing analytics and price optimization—the author suggests that it’s appropriate to augment the traditional perspective with a different sort of TCO:

Total Cost of Objective

Beyond simply looking at the cost to operate and maintain the technologies, the author argues that when you’re evaluating technologies to achieve a desired outcome or objective, you should also consider what it will actually cost to achieve that objective using one solution or another.

After I thought about it a while, this seemed to make a lot of sense.

After all, with traditional TCO comparisons there’s an inherent assumption that the technologies being compared will actually produce the same result—and that’s simply not the case with different types of pricing technology.

The author goes on to illustrate that from a Total Cost of Ownership perspective, one type of pricing technology may appear to be far less expensive than another. But when one considers what it will actually cost to use that technology to achieve a particular financial outcome, the Total Cost of Objective picture is dramatically different.

To my mind, one of the takeaways here is that it’s really important to think about your objectives—because it’s your objectives that provide the context for your investments in pricing technology.

In other words, if you just want to check the box and say that you’re using pricing technology, then traditional TCO comparisons may serve you well. But if you’re actually trying to achieve a financial outcome, you should think hard about how different solutions compare on Total Cost of Objective.

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