How total cost of ownership helps you demonstrate the attractiveness of your product-service offer to the customer

This shift in responsibility is a key reason why PaaS incentivizes circular economy practices. Suddenly, it makes financial sense for a business to promote high utilization of products, reduce unnecessary consumption, and invest in operational efficiency – rather than increasing the number of sold products.

But it can also make sales more challenging.

For customers, the perception of what a product will cost or how much could be saved are key factors when making a purchase decision. At the same time, customers (the B2C segment in particular) have been found to significantly underestimate the total cost of product ownership, such as costs associated with use, maintenance, or depreciation. For example, a study in Germany found that people, on average, underestimate the cost of car ownership by ≈ 52% or ≈240 EUR/month. This phenomenon of underestimating the TCO can cause the price of a PaaS offering to appear artificially high compared to a product sales offering. 

Overcoming the pricing barrier of PaaS

A critical step towards positioning your PaaS offering as financially attractive is to understand your customers' TCO. There are many costs customers do not pay upfront when buying a product. Comparing ONLY the purchasing cost of a product with gaining the same function through PaaS is therefore like comparing apples and oranges.

Thus, we want to understand and estimate the TCO for your customer in two scenarios:

• When choosing product ownership (or any other competing model) and 
• When choosing your PaaS offering

The costs included should preferably cover your customer’s costs over the whole lifecycle – from acquisition to secondary sales or End-of-Life. It is also good to think outside the box. The cost of product failure is one example that can lead to additional costs such as reduced production or productivity.

Including clear and fact-based information about costs and savings helps customers understand your value proposition. It is also a great tool for stress-testing the pricing of your PaaS offering.

To help you calculate your customer’s TCO, we have developed a spreadsheet model (link below) which gives you an overview of your customer’s annual and accumulated costs for product ownership and if applicable, for your PaaS offering. All you need to get started is an estimate of your customer’s costs.

Once you have finished the analysis, we recommend that you verify your findings together with your customer to ensure your results are representative.

An example of the output is found below.