Total cost of ownership (TCO)
Also called TCO.
Everything a piece of software costs over its life, not just the price to build or buy it.
Last updated
What it is.
TCO adds up the build or licence cost, hosting, third-party services and APIs, maintenance, support, security work, training, and the cost of moving away later. For AI features it also includes model usage, which grows with traffic.
Comparing options on TCO over the same period, for example three years, is fairer than comparing day-one prices. A cheap licence with expensive per-seat growth, or a cheap build with heavy technical debt, can cost more over time.
Why it matters
Build-versus-buy decisions are often made on the first invoice. TCO puts running costs next to upfront costs, so a team can see which option is actually cheaper for the way they will use it, and plan budgets for the years after launch.
Common mistakes.
- 01
Leaving out maintenance. Software that is not maintained gets less secure and harder to change every year.
- 02
Forgetting exit costs: data export, migration and retraining when you switch.
- 03
Comparing options over different periods or with different usage assumptions.
Work it out with a tool.
Related terms.
- Technical debtThe future cost of shortcuts taken in code today.
- Time and materials (T&M)A contract where you pay for the hours actually worked, at agreed rates.
- Fixed-price contractA contract where the price for an agreed scope is set up front.
- Inference (AI)Running a trained AI model on new input to get an output, such as an answer, a label or an embedding.
Guides and pages
Browse the full glossary or read answers to common questions.
