SaaS TCO (Total Cost of Ownership) Guide

a lot of people are kind of baffled by or afraid of the nature of handling SaaS TCO. TCO, or total cost of ownership, is the index of entire costs of finances and other trade offs that are incurred to a customer and to the company during their entire lifetime value, or within the smaller fiscal time units one may prefer to use.

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The problem is that there are a lot of values to factor in with SaaS TCO, such as overhead, marketing, sales, CRM management costs, infrastructure costs, and of course, ensuring value for a customer. In business science, people often address concepts like this with absurd, impenetrable math, for calculating metrics based on other metrics, and bringing in arcane mathematics that require a super computer to even begin to understand.

However, I’m not here to meddle in that math nonsense, I’m here to explain TCO in simple terms, and talk about the factors that contribute to it. I’ll talk about how they link together and how to think about addressing these issues.

So, let’s first consider all the metrics we need.

Let’s think about this as parallel paths between costs incurred to the vendor during the phases of a customer experience, first. This gives us the metrics needed for customer acquisition, but not the costs for loyalty. However, it is here that most overhead is revealed.

During need creation, evaluation and leading up to purchase, on the customer’s side, marketing and sales expenses are almost entirely consumed as far as what an experience cycle will consume.

Following this, when the customer adopts the SaaS, requiring training and deployment, professional services to back this are required live or ahead of time, to make this happen. During maintenance and administration, you will see costs for operations and support, and finally, during product use, you’re out there doing your best to revise and develop the product for future product management cycles.

Along with loyalty rewards, concessions and other incentives, these metrics give you your total index of costs on both sides. The customer as an individual’s costs must reflect these total costs in a way that revenue is earned, thus meaning that fees and expenses must transfer over. The if the TCO for the business per unit is higher than for the customer, or the customer’s TCO is not at least five percent higher than the business’, then you know something is terribly wrong.

As for calculating based on this information, I’d say just adding them together or compartmentalizing them to get a basic view is the best route to take. Involving calculus in this is just going to make it pointlessly confusing and complex, when it doesn’t need to be.

Your SaaS TCO is going to parallel in metrics and stimuli your customer experience and your customer relationship management concerns pretty closely, and just as with those, it goes beyond any one department pretty widely. But, once you see that all it is, is nothing more than a parallel set of costs to the company to acquire and retain the customer, following a basic map of customer experience, it’s not so terribly complex of a concept, really.

Omri Erel
Omri is the Head of Demand Generation, as well as the Lead Author & Editor of the SaaSAddict Blog. Omri established the SaaSAddict blog to create a source for news and discussion about some of the issues, challenges, news, and ideas relating to SaaS and cloud migration.
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