Investing in software for your business is a critical, yet sometimes substantial expense. This article is going to help you understand the true cost of implementing your software and how to avoid costly and ineffective solutions.
What is Total Cost of Ownership? What’s the difference between price and TCO?
“Gartner defines total cost of ownership (TCO) as a comprehensive assessment of information technology (IT) or other costs across enterprise boundaries over time. For IT, TCO includes hardware and software acquisition, management and support, communications, end-user expenses and the opportunity cost of downtime, training and other productivity losses.”
Put simply, total cost of ownership is the sum of all costs and expenses related to buying, implementing, and managing your software solutions (either directly or indirectly). This value includes the entire lifecycle from the time of purchase. You can measure each software individually, but it’s also recommended to include every software you operate to gain a true understanding of what your comprehensive technology stack is really costing your business.
Total Cost of Ownership (TCO) is different than price in that price only takes into account the purchase price. For example, if a new platform costs $149/month, what you are really looking at there is the price. The Total Cost of Ownership would include all additional expenses to operate this new system, such as training, onboarding, ongoing support, maintenance, upgrades, etc. TCO also encompasses other costs such as loss in productivity due to correcting system errors, downtime and/or other factors that business owners often omit from their buying decisions.
While price is an important factor, TCO should ultimately be the driving force behind your tech stack decisions.
Why is TCO an important concept?
TCO is such an important analysis because it determines your ROI. Without TCO analysis, software can surprisingly cost a business upwards of 5-8x the original purchase price. This difference in expenses can significantly affect a business, its ROI, and overall success and/or livelihood.
Understanding how much your software is going to cost you over time helps businesses make better buying decisions when deciding which software provides the best possible ROI. This will also shed light on the types of software you should invest in earlier rather than having to go back and reinvest later when you figure out your old system no longer supports your growth.
Not taking TCO into account when looking at systems like CRM and marketing automation can lead to a lot of unwanted surprises down the road.
For example, let’s say a startup invests in a basic, free CRM. While this may work in the beginning stages, down the road, when the business needs more functionality, better data, and more users, they will have to completely start over with a new system. Not only have they wasted valuable data that they could have been collecting from the get-go, they now have to start again from the ground up costing both time and money. While a purchase price of ‘free’ may seem attractive at first, you may pay both the metaphorical and literal price in the long run.
What goes into TCO analysis?
Now that we’ve discussed how important the concept of total cost of ownership is to all businesses when deciding on their technology solutions, let’s take a look at what you should be looking for when performing a TCO analysis.
For the sake of this article, let’s focus on two of the most important yet potentially costly business technologies, Customer Relationship Management (CRM) and Marketing Automation (MA).
The three major costs associated with purchasing and implementing software are the following:
- Acquisition costs
- Operating costs
- Personnel/Resources costs
- Software: This is the cost of the software whether a one-time, monthly, or yearly recurring fee. Also, important to note any additional fees or taxes here.
- Hardware: If you are using a cloud-based platform, hardware is most likely not an issue related to your CRM or MA platform. However, if you choose to build it yourself, this would definitely be a large cost.
- Implementation: This is the cost of setting up your new system for your business.
- Customization: If you need specific customizations built into the software, this is often an additional developer cost. For cloud-based, off the shelf systems like GreenRope, this cost would be considered part of a custom implementation service.
- User licenses: Many cloud-based CRMs require each user license to be purchased separately. Because CRM data is useful throughout the entire company and its departments, this can become quite costly.
- Data migration: Does the new company charge to migrate your data over? Data migration can be an unexpected expense, so ask your vendor what their process is and if they offer this for free. Some of them actually do!
- Training: This is single-handedly one of the largest costs in the acquisition phase of TCO analysis. Your system is virtually useless if nobody knows how to use it properly. Investing in training is one of the best things you can do to increase your success rate with CRM and marketing automation (and any software, frankly).
- API/Developer work for integrating third-party systems: If you need to link up multiple systems to ensure they all talk to each other, this development work will cost you. It’s wise to choose a system with as much of your needed functionality as possible or to use platforms like Zapier to avoid these kinds of expenses.
- Additional user licenses: Hiring more people? Great. Time to add on another user and an entirely new expense each month. If you want to maintain transparency, data integrity, and accountability across your team, you can’t skimp on the user licenses, everyone needs one.
- Ongoing training: Welp. New people means more training. Ongoing training can also be for current users who are looking for training on specific functionality or to expand their knowledge of the platform for more complex uses.
- Software maintenance: How much is it going to cost to maintain your software yearly? Do you need to pay for upgrades? If so, you’re going to want to add these into your calculations. There are plenty of software platforms that do not charge for maintenance, so if you can choose one of those, I would.
- Support & other user/admin costs: Does your software come with free support and resources? Do you have to hire an admin to help manage your software daily? These are all important costs to consider. Having to pay a premium for 24/7 support can add up. There are plenty of options with free support and great customer service.
- Additional integrations: Uh oh, here we go again. Perhaps you need more integrations built into the software because you realized your social media posting platform doesn’t integrate with your CRM and MA platform. Boom, another additional cost.
- Data center: If you’ve decided to go the homegrown route, you’ll need to consider the costs associated with maintaining your servers and all other hardware. Some companies will also want to duplicate their data in data warehouses for business intelligence analysis, so factor in these costs.
- Downtime: If you choose a cloud-based software the chances of this are usually pretty slim, but it’s always important to think about the costs associated with NOT having the software and what that downtime can mean for your team’s overall productivity.
- Security: Again, this is not a cost normally associated with cloud-based systems, but something to think about if you build and operate your own custom software platforms.
- CRM/MA Champion/Admin: Do you need to hire an additional team member or a consultant to manage your CRM and marketing automation tools? If so, that’s another salary to take into account.
- IT support staff: This typically only applies to custom software builds as you will need a team of IT professionals to keep it secure, upgraded and maintained.
- Process/Strategy consultant: Not sure what you’re doing with CRM and marketing automation and your vendor doesn’t provide any resources to help? Hiring a consultant can be highly beneficial for your business overall, but add this as an expense if you have to hire one specifically for your software. Some vendors provide consultative services to help you develop a successful implementation and usage plan. Take advantage of this. They understand the software and can tell you exactly how you should use it to accomplish your goals. Typically, this is provided during the onboarding process as an included element or at an additional cost.
What are your options?
There are so many different pieces that go into total cost of ownership. It’s important to understand the different options you have to help you make the best buying decision for your business.
The Custom-Built System
The custom-built system is a completely customized tool programmed and coded by developers. This type of solution is extremely expensive, hard to maintain, and typically carries the highest total cost of ownership.
The Enterprise Core
This options involves enterprise level software, usually a best-in-class enterprise CRM as the core of your technology stack, and requires multiple custom integrations with third-party systems. Some of these additional systems you will need to integrate include marketing automation, website tracking, social media, project management, web store, predictive analytics, landing page builder and much more. This option can be painfully expensive since you have to purchase multiple different platforms, users for each of those, as well as training.
The Integrated, Complete Solution
This is a more modern solution that integrates sales, marketing, customer service and operations into one platform. The all-in-one, complete CRM solution offers a much more favorable ROI when it comes to technology purchases since you get tools for the whole team in one package. All of your data is housed in one location, accessible by those who need it, and always up-to-date across departments. This creates more efficiency and collaboration amongst your team. This carries the least total cost of ownership out of the three options.
While each option has its pros and cons, ultimately the choice comes down to functionality and value. For a small business, the first two options are just not reasonable routes. They require a vast pool of resources from personnel to deep pockets and take much longer to reach a positive ROI. Even if you have the resources for the first two options, the third option gives business more flexibility across the board.
So, before you invest in a new CRM, spend time mapping out a total cost of ownership analysis and truly understand the investment over time. There are many different vendors out there offering a vast array of solutions. Do the research. Determine TCO and invest in the system that’s going to deliver positive ROI and shorten your path to successful and sustainable growth.
Alessandra Gyben is the Marketing Manager at GreenRope Complete CRM and Marketing Automation, an integrated full-featured business solution. She has been with the company for 7 years, managing their online marketing strategy throughout the entire funnel. She believes in the true integration between sales, marketing and customer service to deliver optimized customer experiences from awareness to conversion and beyond.