What is the total cost of ownership?


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It is unwise to pay too much…. But it’s worse to pay too little.

All of us involved in Sales are familiar with the customer’s response , “Your price is too high. I have a competitor’s bid that is 20% less.”

I recently met a customer who had asked us for a quotation for exhibit models showing a number of different interior configurations. While our price was acceptable at the time for the unit costs, we had an additional cost for non-recurring engineering that the competitor didn’t have.

The non-recurring engineering costs included manipulating the customer’s CAD data and producing precise tooling and molds to manufacture the scale model of the airframe as well as the interior components.

We lost that job due to price. But as I learned, the customer ended up paying for much more than just the original price.

She confided to me that the product she received was made by artisans who referred to sketches, photographs and two dimensional drawings as opposed to 3D CAD generated by her company.  

When she received the first article, she sent it to their engineers who then proceeded to log numerous hours on critiquing the model when they could have been focused on many other engineering tasks.   

Since the first article was produced 8000 miles from their offices, it had to be shipped back to the supplier’s factory for corrections. Then, the modified first article had to be shipped back to them for further analysis.   

At this stage, the customer had now accumulated these costs:

PRICE + Freight (8000 miles each way) + Internal Engineering Costs + the Cost of Time

The models were produced and used at trade shows to illustrate the versatility of the customer’s aircraft. That involved lots of handling and international shipping. This resulted in damage and wear and tear to the models. The models she received were not designed for robust handling, resulting in breakage of the interior components.   In addition, the models were very heavy which raised the cost of freight and handling to the various venues where the models were displayed.

When our customer approached the manufacturer to see about repairs and restoration, she was told the models would have to be sent to the factory (8000 miles away) or they could buy new models. The supplier did not possess the ability to service their product locally.

So after this bit of news the calculation became:

PRICE + Freight (8000 miles each way) + Internal Engineering Costs + the Cost of Time + the extra Cost of freight and handling + the Cost of an asset being out of service

All these added up to the TOTAL COST OF OWNERSHIP.

Our customer admitted that her focus on only price had led her to make a decision that resulted in a very, very high total cost of ownership.

And since the models are still in need of repair and can’t be used, the total costs go up daily, and far eclipse the price.

All of this illustrates what the 19th Century poet and artist John Ruskin is quoted as saying:

“It is unwise to pay too much…. But it’s worse to pay too little.  When you pay too much, you lose a little money… that is all.

When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do.

The common laws of business balance prohibits paying a little and getting a lot- it can’t be done.

If you deal with the lowest bidder, it is well to add something for the risk you run.  And if you do that, you will have enough to pay for something better.”

John Ruskin