How to Calculate Total Cost of Ownership for Software

Having the right software is more crucial than ever. As social distancing guidelines forced businesses to close around the world, selling online became the only option for survival.

Business leaders know the crucial role software plays in this new environment. An April 2020 GetApp survey found that 54% of surveyed website visitors planned to keep their software spending flat or increase it post-pandemic. That’s significant, considering the cost-cutting measures enacted by many businesses to make up for lost sales.

But while software is essential, it’s not easy to shop for. Calculating the total cost of ownership (TCO) per software tool is tough. It’s not enough to compare products based on upfront costs; to get a true sense of what software will cost your business overall, you need to determine your TCO. 

What is the total cost of ownership for software?

A software product’s total cost of ownership is the complete cost you’ll incur to use it over any period of time. This starts with the upfront expense to buy software, then expands to include costs such as monthly versus annual subscription, training team members how to use it, adding or subtracting seats, upgrading to new plans, and more.

It can also include expenses associated with migrating data from one product to another (the costs and risks of migration often prevent businesses from switching software, even if other tools would be a better fit).

Why you should know software’s total cost of ownership.

Software is a big purchase for businesses to make in the short and long terms. Many businesses budget for new tools a few weeks to months ahead of purchasing them, then spend a few weeks researching options.

In a GetApp survey conducted last year, 48% of respondents said they spent two weeks researching software before making a purchase. In the same survey, 31% of respondents said the main thing they would change about the software buying process is making it easier to compare products. 

Here’s where TCO calculations play a key role: You’ll need to compare the collective costs of buying several competing products over the complete period when you plan to use them.

The cost to buy, own, and run software over time is top-of-mind for software buyers, but it’s far from the only cost you should know. Hardware, implementation, training, and support are just a few more costs that can add up through the years. Signing up for more than you bargained for can lead to pricey problems down the line.

For example, let’s say you decide that you want to switch accounting software after using one solution for a few years. If your current tool is part of a larger software ecosystem, you could encounter fiscal costs and business disruptions that outweigh benefits of switching. 

This is doubly true if you end up migrating from on-premise to SaaS software. Vendors can charge businesses to migrate their data on and off platforms, especially if it’s encrypted. But the opposite is true as well; Some vendors offer to migrate data off other vendors for you, thereby absorbing that cost. 

You can’t predict every move your business will make years from now, but you should take the long view when shopping for software. It’s misleading to shop for software based on upfront costs alone; TCO is a more complete measure of the costs to use software over time.

How to find software’s total cost of ownership

Total cost of ownership is unique to your business. When calculating your software’s TCO, keep in mind that:

1. There are two main types of software: on-premise licenses (which are perpetual) and Software-as-a-Service (SaaS) subscriptions (which are monthly or, most often, annual).

2. SaaS vendors tend to offer monthly versus annual subscriptions. It’s common for annual subscriptions to be cheaper, enticing customers to commit to a longer contract. 

3. On-premise software incurs more costs for hardware than SaaS subscriptions. On-premise solutions require servers to host the software and devices that use the correct operating system. These solutions can’t always be accessed remotely, and if they can, third-party support is often needed. This puts remote workforces at a disadvantage, especially in the COVID-19 era with so many employees working from home.

4. Calculate the difference between named user pricing versus concurrent user pricing. Named user pricing gives each user their own login and simultaneous access to the software. Concurrent user pricing provides a fixed number of logins that anyone can use, but only that fixed number can log in at once. Assessing which pricing model you’ll need can keep you from overpaying or underpaying.

5. Whether you choose an on-premise or SaaS solution, don’t select software purely because it’s free. These tools might seem low cost, but they often restrict access to features, storage, number of users, and more. This could mean you pay more down the line for additional tools or to upgrade the free solution, rather than investing in the right paid plan upfront.

Ready to start your own TCO calculations?

GetApp’s calculator lets you see the complete cost of any tool you’re considering.