Does Total Cost of Ownership (TCO) Matter in Pricing Software?
January 19th, 2022 (Updated 03/10/2023) | 10 min. read
Congrats! You have identified that pricing software will give your company the edge that it has been seeking. The next step is putting together a detailed analysis of the costs involved in getting the software up-and-running and powering your organization towards achieving the bottom-line benefits that innovative pricing software provides. However, the next phase in the process is a tricky one and not as clear cut as you hoped it might be. The question suddenly arises, ‘What is the Total Cost of Ownership (TCO)?” exactly and how does it apply to the software alternatives you are looking at and why is it important?
TCO in the software sphere is defined by leading technology and research company, Gartner, as “a comprehensive assessment of information technology (IT) or other costs across enterprise boundaries over time. TCO includes hardware and software acquisition and/or subscription costs, management and support, communications, end-user expenses and the opportunity cost of downtime, training, and other productivity losses.”
In this general regard, pricing software differs little in terms of TCO from regular software. However, when you boil things down a little further, subtle differences can begin to appear between the TCO of pricing software and more general applications.
At Experis Solutions, we have been providing IT and business services to companies worldwide for a while now to assist them in accelerating their unique business transformations.
Now, together in partnership with Pricefx, we are concentrating our combined energies and expertise on full-service pricing focus on software deployment, data integration and functional/strategic price consulting. It’s why we have put together this article to assist you in understanding the complexities of TCO in the niche pricing software sector, why it is important and even considering the limitations of discussing TCO in the modern pricing software environment.
Why is TCO important When Considering Pricing Software?
When you’re evaluating a new pricing software option, you want to make sure you not only understand the initial costs, but also the ongoing costs. The combination of those two things impacts if you can afford new pricing software and can impact your overall bottom line.
EXPERT TIP – What is less obvious but arguably even more important about TCO is that it should not standalone by itself as a solution. TCO will never help prioritize what business decisions to take.
For example, knowing that your TCO is $3 million for example, the pure numbers tell you little at all. However, on the other hand if that $3 million TCO brings $15 million in value to your company, well heck, that is not only great news, but it is insightful. Knowing the value of ownership in your numbers will assist you to look at and decide where your business objectives and priorities should be.
Sure, you’ll need to know the TCO of any pricing software you’re evaluating to make an informed purchasing decision and understanding the value of the pricing software asset over its lifetime. However, the real importance of understanding the TCO lies in the value it can bring to your business.
One of the benefits of TCO is that it helps the workforce to focus on more strategic priorities. In today’s working environment, that is becoming more important.
Is there a difference between calculating the TCO of pricing software & other software solutions?
The short answer is yes, you better believe it, and as technology continues to evolve and become more specialized, the difference between the TCO of pricing and regular software is becoming more defined.
With leading pricing software companies making the shift to an annual subscription method of payment rather than purchasing software outright, the financial risks to organizations are lower. Pricing software based on a subscription model (whether it be monthly, quarterly, annually etc.) versus a one-time enterprise purchase needs to be evaluated. What’s more, it’s a new payment model made possible by changing the technology to cloud-based solutions where upgrades, add-ons and new pricing strategies can be implemented on the fly.
EXPERT TIP – With native cloud-based pricing software solutions, TCO is reduced when compared to the costs of ‘on-premises’ first-generation legacy pricing software.
Take that onboard when comparing different pricing software solutions.
A native cloud solution versus a migrated cloud solution will generally have less cost involved.
What’s more, migrated cloud solutions on occasion can still have lingering on-site solutions required adding to the organizational burden and cost.
New Generation Pricing Software Technology Drives Cost-Cutting
One of the important things about the way that new flexible cloud-based technology drives modern pricing software is that you can start small and build up your use of a pricing software model over time. For example, if you operate a several different subsidiaries of your company globally, you can perhaps start small with a modest pricing software subscription in a market that needs it most and build the adoption of the software worldwide over time and as resources become available.
Related to the flexibility of the technology and how it adds value to the pricing solution, is that modern Next Gen AI-based pricing software can also be integrated to draw data from your existing systems.
Many companies are starting to use their in-house CRM (Customer Relationship Management) platform as a kind of user interface for their pricing software users. Modern pricing software integrates well with CRMs (Customer Relationship Management Systems) in the back end, (in addition to many other disparate data sources that many organizations have these days), saving a lot of time and money.
The ‘Unseen’ Cost of Not Using Pricing Software
A less tangible and harder to define benefit of pricing software to reducing your TCO is calculating the cost of not having pricing software. By that, we mean, considering the value the pricing software is adding to your monthly, quarterly, or annual bottom line. If you don’t use pricing software to calculate things like growing profit 2% in a particular market or off a specific product, what tool will you use to calculate those numbers in real time? Excel? No, probably not.
To be blunt about it, think about what it will cost your company not to implement pricing software and what pricing software can add to your bottom line when implemented. How extensive that analysis might be in your company could depend on the importance your company places on pricing, your company’s pricing maturity and if you have the resources to make it a priority.
Formulas to Calculate the TCO of Pricing Software
Unfortunately, there is no magic bullet or generic formula to calculate TCO for your company. Take it as a compliment highlighting the diversity of your business. Every business organization is unique and the way your company is structured, your products, customers and sales cycles are specific to you.
A Generic TCO Calculation Formula That May or May Not Apply For Your Business
Initial Cost (Subscription Fee or Outright Purchase Price) + Operation Costs + Downtime Costs + Maintenance Costs + Production Costs MINUS Depreciation (After 3 or 4 years) = Relative Total Cost of Ownership (TCO)
But remember, it will be a unique formula for each distinct business organization and each pricing software vendor.
For example, with Next Gen pricing software and its subscription payment format, depreciation costs are eliminated.
Whatever specific formula you use in calculating the TCO of your unique business model, consider that the cleaner your data set to feed into your pricing software, the better integration usually unfolds and the smoother the ‘transformation road’ of that data into a clear and transparent pricing policy will become.
Which Variables Are Most Important in Calculating Your TCO?
At the risk of sounding like a broken record, as your company is different to every other company, there are no silver bullets to say which will be most important variables to calculating your TCO of pricing software. For example, if two companies are doing a TCO analysis on the same pricing software provider, their results may come out completely differently as each company may be addressing a separate set of costs. TCO may not necessarily be something your organization will need to calculate when comparing pricing software vendors.
That said, overall, you will be looking at your initial outlay and costs to keep the software up-and-running and well-maintained.
The three major costs associated with purchasing and implementing pricing software are the following:
- Acquisition costs
- Operating costs
- Personnel/Resources costs
The unseen factor that many companies new to pricing software technology don’t think to track is the power that data analytics provides to the price optimization. The value and positive impact that the technology adds to profit and assists by decreasing margin leakage should not be ignored. Subtract those fees off your TCO and suddenly, wham!
Pricing software technology appears as a bargain, and the question is spun on its head. Perhaps it is not about how much the technology costs, but the question really is, can your business afford not to have pricing software?
The Limitations of Considering TCO for Pricing Software
Of course, we totally understand that TCO is a great guide for thinking about if your company can afford the technology outlay in the first place. However, don’t fall into the nasty trap of using it as a standalone metric. Understanding value can only really be totally understood if you take pricing software for a ‘test drive’. What we have recommended in the past to a range of happy and surprised clients is to start small with a data analytics package.
There is nothing like a business discovering for themselves how the power of price management and optimization with the use of a good data analytics package can impact the company’s bottom line. Starting small with implementing a 2-3% profit increase powered by price can be a real revelation. Once it’s been experienced, it’s then easy to add-on further features like managing your rebates and discounts for example, to influence price to finally reach a point where potentially a 1% lift in your base price can lead to a profit increase of up to 8%.
Only then can it become readily apparent that the TCO of pricing is less about the subscription and maintenance costs, and more about the potential profit your business will leave on the table without it.
How to be Proactive in Decreasing the TCO of Pricing Software
Now you know exactly what Total Cost of Ownership (TCO) is in the price software environment, why it is important and why calculating TCO as an independent metric is not a standalone way to truly appraise the costs and value to your business.
As proud partners in the pricing industry, Experis and Pricefx share the same commitment to reducing both TCO and time to value, thereby enabling our clients to become more profitable and do it faster.
If the discussion above has piqued your interest in pricing software, you might be interested in how long it takes to implement pricing software or even how to integrate Pricefx pricing software with your existing system easily. Alternatively, if you’d like to dive in deeper, check out our webinar where we discuss the overlooked benefits of TCO.