The difference between ROI and TCO: Why it matters to you
During the business decision-making process, ROI and TCO are two important terms often used to evaluate whether an investment is worth it. Although both terms are related to finance, they focus on different aspects of an investment.
ROI: Return on Investment
ROI, or Return on Investment, is a measure of the profitability of an investment. It calculates the return you receive on a particular investment relative to the cost of that investment. The ROI percentage is often used to determine whether an investment makes financial sense. The formula for ROI is:
ROI = ((Revenue Investment – Cost Investment) / Cost Investment) x 100%
Specific example
Suppose your company invested €10,000 in new marketing campaigns and this investment resulted in a €20,000 increase in sales. Your ROI would then be calculated as follows:
ROI = ((€20,000 – €10,000) / €10,000) x 100% = 100%
This means that your investment of €10,000 resulted in a profit of 100%.
TCO: Total Cost of Ownership
TCO, or Total Cost of Ownership, is a broader measure that includes the total cost of a given investment throughout its life. TCO considers not only initial costs, but also operational and maintenance costs incurred over the life of the investment. This approach provides a comprehensive picture of the financial impact of an investment. The calculation may vary by investment, but in general the formula is as follows:
TCO = Initial Investment Amount + Operating Costs + Maintenance Costs + Renewal Costs + End-of-Life Costs
Specific example
Let’s take the example of the previous marketing investment. In addition to the initial €10,000 investment, you also spent €5,000 on ongoing advertising costs and €2,000 on maintenance and monitoring during the year. The TCO of your investment would then be calculated as follows:
TCO = €10,000 + €5,000 + €2,000 = €17,000
This means that the TCO for this marketing investment is €17,000.
In a nutshell
The main difference between ROI and TCO is that ROI focuses on the return relative to the initial investment, while TCO includes all costs over the life of the investment. Both are valuable tools in making business decisions. ROI helps identify the profitability of an investment, while TCO provides a more comprehensive view of the financial impact. It is important to remember that ROI and TCO are not mutually exclusive; they complement each other.
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