CTO’s Playbook: Master Your Total Cost of Ownership in 2025

Total cost of ownership (TCO) is much more than a software’s sticker price. It’s a lot more than what meets the eye. Just as you wouldn’t buy a house based only on the listing price but also look for the maintenance, utilities, etc, costs, a CTO must look beyond initial development costs to understand the actual cost of a digital product over its life.

Total cost of ownership is the total cost of acquiring, using, managing, and withdrawing an asset over its entire life cycle.

This holistic view of cost is crucial for CTOs, CEOs, and enterprise decision-makers because it impacts ROI, budgets, and long-term strategy. Understanding total cost of ownership helps you uncover hidden expenses that might otherwise blindside the business. It forces you to consider future hardware refreshes, software updates, or training needs that could ‘come to bite you down the road’ if you overlook them.

The goal isn’t simply to cut costs but to maximize business value for every dollar spent over the product’s life. In short, TCO analysis gives you a compass for decision-making, ensuring tech investments contribute to your company’s value instead of becoming unexpected burdens.

Components of Digital Product’s Total Cost of Ownership

A digital product’s TCO spans all costs from inception to the retirement of the product. It can be broken down into several major components, each capturing different cost drivers over the product’s lifecycle:

1. Development and Implementation

It’s the up-front costs of building or acquiring the product. This includes software development efforts or purchase/licensing fees, hardware procurement, and implementation services. It also covers initial setup tasks like data migration from legacy systems, configuration, and customization to business needs.

For example, implementing enterprise software might incur costs for front-end design, back-end integration with other systems (ERP, CRM, etc.), and one-time setup fees. If you’re buying a commercial solution, upfront costs might involve negotiating license contracts (often with discounts but with support contracts—20% of license cost per year) and paying for consultants or an implementation partner.

In custom development., this bucket includes developer salaries or contractor fees, development tools, and potentially longer timelines. Significantly, scope creep during development can greatly inflate total cost of ownership, so managing the project scope is critical.

2. Infrastructure and Operational Costs

It’s the ongoing cost of running and hosting the product in production. These are recurring expenses like server or cloud infrastructure fees, network costs, and platform subscriptions. This includes monthly cloud service bills, third-party API or SaaS service fees, and scaling costs as usage grows for cloud-based products.

For on-premises systems, it includes data center costs, power/cooling, and hardware maintenance or leasing. Licensing renewals for software or middleware also fall here. For e.g., annual renewal of database or API access licenses.

Security expenses are a significant operational cost – e.g., paying for firewalls, DDoS protection, intrusion detection, and SSL certificates, especially for externally-facing applications where robust security is a must.

3. Maintenance and Upgrade Costs

After the launch, maintenance becomes a continuous cost center. To keep the product up-to-date, you need to:

• Regular update your software
• Fix bugs,
• Tune your software’s performance
• Do periodic upgrades

Technical debt plays a huge role here. Shortcuts in development or outdated code can incur a ‘debt’ that must be ‘paid’ via refactoring or re-engineering later. Neglecting this can balloon your total cost of ownership, as fixing poorly designed code or outdated infrastructure is costly.

Maintenance covers compatibility updates with new browsers and scalability enhancements as user demand grows. Don’t forget the cost of downtime: if maintenance isn’t done well, outages can occur, resulting in lost revenue or SLA penalties – an often underestimated cost.

4. Support and Customer Service

Beyond technical maintenance, consider the cost of supporting the product’s users. This could mean a customer support team helping external users (for a commercial software product or SaaS service) or an internal helpdesk supporting employees if the product is an internal system. Support costs can include:

• Salaries for support staff
• Outsourcing support services
• Maintaining knowledge bases
• Ticketing systems

Many enterprise software vendors also charge annual support contracts (often 15-20% of the software license price), which provide access to updates and vendor assistance. If your product is customer-facing (e.g., a mobile app or SaaS), you might have to scale customer support as your user base grows, adding to the total cost of ownership.

User onboarding and training are also tied in here. For example, if deploying a new CRM internally, you may run training sessions and have power users help others, incurring productivity costs. These human resource costs are easy to overlook but essential to include.

5. Security and Compliance

Security, risk mitigation, and compliance requirements have their own costs that persist throughout the product lifecycle. This includes implementing security controls and updating them as threats evolve:

• Authentication systems
• Encryption
• Security audits

If you operate in regulated industries like finance, compliance with standards (PCI DSS, HIPAA, GDPR, SOC2, etc.) can require significant investment, from certification processes and auditing to ongoing compliance monitoring.

Legal and regulatory compliance costs should also be counted in total cost of ownership. Often, compliance needs can influence architecture choices, for instance, adding audit trails, data encryption at rest, etc., which may increase development and infrastructure costs. While these costs don’t directly add user features, failing to invest here can result in even more expensive breaches or fines.

You should capture these ‘must-have’ expenditures as part of responsible product ownership in your total cost of ownership analysis.

6. Training and Personnel Development

A digital product is only as good as the team using and maintaining it. Employee training is a notable component of total cost of ownership, initially and continually. There’s also an opportunity cost when highly skilled engineers spend time managing infrastructure or tooling for the product. Their cost is part of total cost of ownership, and every hour they spend on undifferentiated work is an hour not spent on innovation.

Some total cost of ownership models explicitly call out human costs because they can be substantial and sometimes hidden. Including training, documentation efforts, and even change management costs will give a more realistic total cost of ownership. For example, if you overlook the cost of license management and don’t train someone to monitor software license usage, you might overpay for unused licenses until an audit reveals it.

7. Retirement and End-of-Life Costs

Every product will eventually be retired or replaced; surprisingly, this final phase carries costs, too. Decommissioning a system involves migrating data to a new system or archiving it, which can be complex and resource-intensive. You may need to run the old system in parallel during the transition, incurring double costs.

The following are all part of the retirement costs:

• Data export
• Format conversion
• Disposing of old hardware
• Retaining backups
• Retaining archives for compliance

There might also be contract termination fees if you’re ending licenses or cloud contracts early. While retirement costs are often smaller than the operational phase, they’re essential for completeness. Neglecting to plan for them can lead to surprise expenses (or data loss risks) at the end of a product’s life.

In summary, total cost of ownership encompasses initial capital expenditures and ongoing operational expenditures across all these categories. A useful mental model is to bucket costs into one-time (CapEx) vs recurring (OpEx) or into the ‘Initial, Ongoing, and End-of-Life’ phases. However you slice it, be sure to account for everything needed to own and operate the product over time.

How Do You Calculate Total Cost of Ownership?

Calculating a digital product’s Total Cost of Ownership (TCO) isn’t just about adding numbers on a spreadsheet but understanding the actual financial impact of owning and managing that product over time. Calculating TCO aims to uncover the visible and hidden expenses that often get overlooked.

Here’s a step-by-step guide to help you calculate total cost of ownership in a simple yet strategic way:

1. Define the Timeframe

Start by determining the lifecycle of the product you want to assess. Most organizations evaluate TCO over 3 to 5 years, depending on how long they plan to use or support the product.

2. Identify All Direct Costs

These are the obvious, measurable costs of creating and running the product. For example:

• Software development or purchase costs
• Infrastructure expenses (e.g., cloud hosting, servers)
• Salaries of developers, DevOps, and support staff
• Licensing fees for tools and APIs
• Training programs for employees and users

These costs usually fall under the CapEx (Capital Expenditures). You can track and forecast the CapEx of the product easily.

3. Don’t Ignore Indirect Costs

These are the hidden, often underestimated expenses that quietly increase the total cost of ownership of the product over time. You must also watch for:

• Productivity loss due to downtime or system issues
• Technical debt that requires future rework
• Employee time spent on troubleshooting and support
• Customer churn due to poor user experience or slow performance
• Compliance efforts and audits

While these can be harder for you to quantify, indirect costs can account for over 50% of total IT spending, according to various industry reports.

4. Break Costs into Lifecycle Stages

Total cost of ownership spans the entire journey of your digital product. To better estimate it, organize costs by key phases:

• Initial phase: Planning, development, infrastructure setup, implementation
• Ongoing phase: Support, maintenance, upgrades, cloud usage, security, and compliance
• End-of-life phase: Decommissioning, data migration, offboarding tools, and archiving

This phased approach helps you anticipate costs at each stage rather than lumping everything together.

5. Factor in Scalability and Usage Growth

As your product scales, so will your costs. Think about:

• Increased cloud consumption
• More users needing support and onboarding
• Higher maintenance demands
• Upgraded infrastructure for peak performance

Build flexible estimates that account for growth scenarios, not just current usage.

6. Include Risk and Opportunity Costs

Ask yourself:

• What happens if the product goes down for a day?
• What’s the cost of delaying a feature release?
• Could choosing one solution over another will speed up your time-to-market?

These opportunity costs do not appear on invoices but can significantly impact your business outcomes.

7. Use Total Cost of Ownership Tools and Templates

To streamline your calculation:

• Use spreadsheets with built-in cost categories
• Leverage total cost of ownership calculators from platforms like AWS, Azure, or Google Cloud
• Consider tools like Apptio or CloudZero for detailed cost tracking across departments

These tools offer you a more granular view of costs and help you make apples-to-apples comparisons between solutions.

Use Cases and Examples of Total Cost of Ownership

Understanding the Total Cost of Ownership (TCO) is one thing; knowing how to apply it in real-world scenarios is where it truly adds value.

Let’s explore some of the most common and impactful use cases with examples where total cost of ownership can guide your decisions better.

1. SaaS vs On-Premise Solutions

One of the most frequent total cost of ownership comparisons is between Software-as-a-Service (SaaS) and on-premise solutions.

SaaS typically has lower upfront costs and quicker implementation. However, it involves recurring subscription fees, data storage charges, and potential overage costs as your usage grows.

On the other hand, on-premise solutions usually require a higher initial investment in hardware and setup. Still, they may offer lower recurring costs over time, especially if your internal team can manage your IT infrastructure.

When you are evaluating these options, it’s essential to look beyond the price tag:

• Include costs for maintenance, updates, security, and support
• Factor in long-term scalability and vendor lock-in risks
• Account for potential downtime or service limits in SaaS agreements

According to Gartner, organizations that ignore post-purchase costs in cloud solutions can overspend by up to 70% over five years if they don’t align cloud usage with business needs.

Real-World Example

Mount Sinai Health System initially adopted a cloud-based EHR. However, they later chose a hybrid model when their total cost of ownership analysis revealed that hosting sensitive patient data on-premise could reduce long-term security and compliance costs.

Cloud may be faster to deploy, but regulatory needs and growth patterns can tip the total cost of ownership in favor of on-premises, especially in heavily regulated industries.

2. Build vs Buy Software

Are you also confused about whether you should build your own solution or buy an off-the-shelf product? Well, the good news is that total cost of ownership helps you answer this dilemma!

Building a custom product gives you complete control and flexibility but requires more time, specialized talent, and ongoing investment in updates, support, and scalability.

Whereas buying a ready-made solution reduces your time-to-market but may include limitations in customization and recurring licensing fees.

From a Total Cost of Ownership perspective:

• For custom builds, account for not just development time but also future maintenance, integrations, and technical debt your software will require.
• If you buy software, include vendor fees, implementation, training, and potential upgrade costs.

Forrester Research found that 60% of companies underestimate the long-term cost of maintaining custom-built software, leading to unplanned expenditures and delayed innovation.

Real-World Example

Segment, a customer data platform, initially built its own internal billing system. After a year of delays and maintenance headaches, they switched to Stripe Billing. This move saved their developer time and reduced total cost of ownership significantly.

Just because you can build something, always doesn’t mean you should. In these types of scenarios, total cost of ownership helps you justify when buying is actually the wiser investment.

3. Evaluating E-Commerce Platforms

Choosing an e-commerce platform isn’t just about your software design and features; it’s a long-term cost decision.

Platforms like Shopify or BigCommerce offer convenience and plug-and-play solutions but may charge you transaction fees, app add-ons, and commission percentages.

On the other hand, open-source or custom platforms offer more control but come with hosting, development, and support overhead.

From a Total Cost of Ownership perspective, you should:

• Calculate infrastructure costs during high-traffic seasons (e.g., Black Friday)
• Include third-party tool costs like CRM, inventory, and marketing integrations
• Consider downtime penalties or poor performance impact on revenue

According to Forrester, cart abandonment due to poor website performance can cost retailers over $18 billion in lost sales annually, highlighting the impact of performance-related TCO components.

Real-World Example

Gymshark, a global fitness apparel brand, migrated from Shopify to a custom solution. While the switch required significant investment, it reduced their transaction fees and gave them better control over scaling. Thereby improving their long-term total cost of ownership.

The key takeaway from this pointer is that scalable platforms with predictable fees may win in the short term, but as sales grow, transaction-based models can hurt profit margins. Total cost of ownership helps you forecast that trajectory.

4. Mobile Application Development

Mobile apps may seem lightweight but carry long-term costs that can quickly add up. Frequent OS updates (iOS, Android) mean you’ll need ongoing development resources to stay compatible. Supporting multiple screen sizes and devices increases testing and design complexity. And app store compliance, security updates, and user analytics tools incur additional fees.

From a Total Cost of Ownership perspective:

• Include ongoing developer time for updates and testing.
• Plan for backend infrastructure, analytics tools, and cloud storage
• Account for support needs as the user base grows

Also, don’t forget app marketing and user acquisition costs. Even if the app is free, your total cost of ownership must include the cost to attract and retain users.

Real-World Example

Airbnb switched from maintaining separate iOS and Android native apps to a React Native-based architecture. This cut development time by 30% and significantly reduced total cost of ownership while ensuring feature parity across platforms.

Planning for platform diversity and future updates upfront helps you manage long-term costs better. Cross-platform frameworks can be a TCO-friendly alternative.

5. Migrating to the Cloud

Cloud migration is often seen as a cost-cutting measure, but the full picture is more nuanced. Cloud offers flexibility, faster deployment, and reduced hardware maintenance. However, without monitoring, usage costs can escalate quickly, especially with compute-heavy applications.

From the perspective of Total Cost of Ownership, you should:

• Consider migration costs, data transfer fees, and training your team on new tools.
• Factor in ongoing monitoring and FinOps practices to avoid bill shocks.
• Compare long-term cost efficiency of reserved instances vs on-demand usage.

Gartner estimates that through 2024, 60% of infrastructure and operations leaders will face public cloud cost overruns that negatively impact their on-premise budgets.

Real-World Example

Adobe adopted a cloud-first strategy and migrated many services to AWS. They eventually built an internal FinOps team to monitor and optimize spending. This saved them millions by rightsizing compute resources and automating cost governance.

Remember, cloud doesn’t always mean a cheaper option. Without visibility and control, cloud total cost of ownership can balloon over time. Proactive monitoring and FinOps practices are key.

6. System Modernization and Legacy Replacement

Replacing legacy systems is essential for agility, but it’s not a one-time expense. Costs include data migration, re-training teams, downtime during transition, and ensuring compliance. There may also be parallel operation costs if the old and new systems need to run side-by-side for a period.

From a Total Cost of Ownership perspective, you should:

• Include all change management and user training efforts.
• Account for risks of data loss, system errors, or team resistance.
• Include the cost of phasing out legacy vendors or hardware.

One of the best practices for system modernization and legacy replacement is to create a phased roadmap and assign clear ownership for cost management at each stage.

Real-World Example

UK’s HMRC (Her Majesty’s Revenue and Customs) modernized its tax systems, transitioning from legacy databases to modern APIs and microservices. Though it was a multi-year project, it resulted in faster processing, reduced support calls, and a lower five-year Total Cost of Ownership.

Therefore, the cost of doing nothing or delaying modernization can be higher than the cost of change. TCO gives a clearer view of long-term value.

How Can CTOs Minimize Their Total Cost of Ownership?

Minimizing the Total Cost of Ownership (TCO) doesn’t mean cutting costs; it means spending smarter. As a CTO, we understand your challenge to reduce long-term costs without stalling innovation or sacrificing quality. However, with the right strategies, you can do both.

Here’s how to optimize your digital product’s total cost of ownership while still keeping your innovation engine running strong:

Practice 1: Design Your Software for Scalability from Day One

Building a scalable digital product means it can grow with your users and demands without requiring constant rework. If your architecture isn’t built to scale, you’ll likely face costly redesigns down the line.

What you can do:

• Use modular architecture (like microservices) to allow flexible updates without breaking the system.
• Adopt cloud-native principles to automatically scale based on usage.
• Choose frameworks and technologies with strong community support and future viability.

For example, Netflix uses microservices to scale each part of its service independently, avoiding major system overhauls and keeping total cost of ownership low as they grow.

Practice 2: Invest in Automation Early

Manual processes drain resources. Automation helps streamline development, testing, deployment, and monitoring. According to McKinsey, automation in IT operations can reduce operational costs by 20% to 30%.

What you can automate:

• CI/CD pipelines for faster, error-free deployments
• Testing workflows to catch bugs before production
• Infrastructure provisioning using tools like Terraform or AWS CloudFormation
• Monitoring and alerts to quickly resolve issues and reduce downtime

Pro Tip: Automating repetitive tasks lowers labor costs and accelerates innovation by freeing up your developers’ time.

Practice 3: Monitor and Optimize Cloud Costs Continuously

Cloud services can be deceptively expensive if not actively managed. What starts as an affordable option can quickly balloon into one of your most oversized OpEx line items.

What you can do:

• Implement FinOps practices, a financial operations framework that aligns engineering, finance, and business goals.
• You can use tools like AWS Cost Explorer, Azure Cost Management, or CloudZero to track your usage and identify waste.
• Set up budgets, thresholds, and alerts to avoid surprise costs.

Bonus Tip: Rightsizing your instances, removing unused resources, and using reserved or spot instances can significantly lower cloud-related total cost of ownership.

Practice 4: Prioritize Technical Debt Management

While it’s tempting to move and ship features quickly, ignoring technical debt can cost more in the long run. Fixing poor-quality code, outdated libraries, or quick hacks later is far more expensive than doing it right up front.

What you can do:

• Set aside regular sprints or “debt weeks” to refactor code.
• Track and document your technical debt using tools like Jira, Linear, or GitHub issues.
• Include technical debt discussions in product roadmap planning.

Reminder: Good code is easier to maintain, cheaper to debug, and faster to scale, directly impacting long-term total cost of ownership.

Practice 5: Standardize and Document Processes

Lack of documentation leads to confusion, slow onboarding, and unnecessary rework, all of which increase your total cost of ownership.

What you can do:

• Maintain centralized documentation for systems, APIs, architecture decisions, and workflows.
• Use internal wikis or tools like Confluence, Notion, or GitBook.
• Create onboarding guides and reusable templates to speed up your new team member integration.

Bonus: Documentation reduces knowledge silos and makes it easier for your teams to troubleshoot without costly delays.

Practice 6: Regularly Audit Subscriptions, Licenses, and Vendors

If you ignore or forget unused or underutilized software licenses, buckle up. They quietly inflate your operational costs.

What you can do:

• Run quarterly audits to check what’s being used and what’s not.
• Eliminate duplicate tools that serve the same purpose.
• Negotiate better terms with vendors, especially for multi-year or high-volume agreements.

Stat: Gartner reports that organizations waste up to 25% of their software spend on unused licenses or redundant subscriptions.

Practice 7: Choose the Right Tech for the Right Job

Trendy technologies can be exciting, but they’re not always the best fit. Sometimes, simpler tools are more efficient and easier to maintain.

What you can do:

• Evaluate technologies based on long-term support, talent availability, and integration capability.
• Avoid vendor lock-in where possible. Instead, opt for open standards and APIs.
• Make decisions based on value to your users and the business, not just novelty.

Pro Tip: Balancing innovation with practicality ensures your tech stack stays lean and maintainable.

Practice 8: Encourage a Cost-Conscious Culture

Technology decisions shouldn’t rest solely with finance teams. You engineers, product managers, and even designers play a role in total cost of ownership. Therefore, involve and educate them for the same.

What you can do:

• Educate your teams about the cost implications of their choices.
• Involve engineers in budgeting conversations, especially around cloud usage.
• Make cost monitoring a part of your sprint reviews and retrospectives.

By doing so, you will achieve a team that understands cost impact and will naturally build more efficient, scalable, and maintainable products.

Think Beyond the Initial Cost of the Software

Embracing the Total Cost of Ownership (TCO) mindset means shifting your vision from short-term thinking to a long-term, value-driven approach. It’s not just about how much something costs today but how much it will continue to cost (or save) you over the entire lifecycle of your digital product. Instead of focusing only on initial development or purchase costs, the TCO mindset encourages you to ask:

• What are the recurring costs associated with maintaining this product?
• How will support, upgrades, and scaling affect your budget over time?
• What risks (like downtime, compliance gaps, or security breaches) could add hidden costs?
• Is this technology choice sustainable five years from now?

By considering these questions upfront, you can better assess whether a decision aligns with your current goals and future responsibilities.

Benefits of Adopting Total Cost of Ownership Mindset

Now that you are aware of the fundamental aspects of total cost of ownership, let’s glance at how making TCO a part of your decision-making process benefits your business.

• You will receive fewer budget overruns and financial surprises.
• You will be able to make smarter and more strategic investments.
• There will be greater transparency in your vendor and product evaluation.
• You will have better alignment between technical decisions and your business goals.
• Being a C-suite and stakeholder, you will get more substantial justification for your tech initiatives.

Wrapping up!

Last but not least, total cost of ownership is a mindset that separates reactive leaders from strategic ones. When you understand the full cost of ownership, you’re not just managing technology but mastering it. The companies that win are the ones who plan, not just build.

Make total cost of ownership your competitive advantage, not your blind spot!

Frequently Asked Questions

1. What are the 5 most important elements of TCO?

The five key components of Total Cost of Ownership (TCO) are:

• Acquisition Costs: Initial expenses for purchasing assets, including hardware and software.
• Operational Costs: Ongoing expenses for daily operations, such as utilities and staffing.
• Maintenance Costs: Costs for regular upkeep, including repairs and updates.
• Downtime Costs: Losses incurred from system outages or performance issues.
• End-of-Life Costs: Expenses related to decommissioning, disposal, or replacement of assets.

2. What does total cost of ownership mean?

Total cost of ownership is the comprehensive cost of a product or system, encompassing its purchase, implementation, maintenance, support, and other ongoing expenses throughout its entire lifecycle.

3. What is digital total cost of ownership?

Digital Total Cost of Ownership refers to the complete cost assessment of owning and managing digital assets, such as software applications or IT infrastructure. It encompasses initial development or purchase costs, implementation, training, maintenance, support, and eventual decommissioning. This evaluation ensures that digital investments align with business objectives and budget forecasts.

4. How do you calculate total cost of ownership?

To calculate total cost of ownership:

1. Identify Acquisition Costs: Sum up all initial expenses like purchase price and installation.

2. Add Operational Costs: Include ongoing expenses such as utilities, staffing, and training.

3. Factor in Maintenance Costs: Account for regular maintenance, updates, and repairs.

4. Include Downtime Costs: Estimate potential losses from system outages or reduced productivity.

5. Consider End-of-Life Costs: Plan for expenses related to asset disposal or replacement.

The formula for calculating total cost of ownership is:

TCO = Acquisition Costs + Operational Costs + Maintenance Costs + Downtime Costs + End-of-Life Costs.