When consumers make simple purchases, price is often the first – sometimes only – consideration. Someone throwing a party, for example, would probably choose a $3 bag of ice over a $10 bag of ice if the amount of ice in each bag was exactly the same. Because no matter how much you pay for ice, it’s always just frozen water. Expensive ice doesn’t melt any slower.
When making a considerably larger, more complicated purchase, however, the Total Cost of Ownership (TCO) has to be considered. TCO is the price of new equipment, the cost to install it, plus ongoing costs such as the energy used to operate it and long-term maintenance. In simple terms, cost is the price of buying something; TCO is the price of buying and using it.
TCO certainly applies when purchasing industrial HVAC systems, but sometimes a customer needs help seeing beyond the price tag. Here are some discussion points:
- The basic calculation: The first step in determining TCO is to calculate the installed system’s cost and add the estimated cost for the energy needed to operate the system over its estimated lifetime. Next, add the cost for preventative maintenance and estimated repair costs during the total lifetime of the system. The sum of these four costs represents the bulk of the TCO.
- Break it down: Take that TCO number you arrived at and divide it by the number of years you expect the system to be in service. This will provide the total cost of operation per year. Hopefully the prospective customer will be able to compare that annual cost to the cost per year of the system they are replacing and see significant savings.
- Procrastination is costly: Limping along with an aging HVAC system isn’t necessarily frugal. It may be tempting to keep putting a major capital expense off for one more year, and then another year, but aging systems often require frequent repairs in addition to regular maintenance —which equates to a higher cost of ownership. Explain to customers that trying to extend the life of an old system may be costing them more than they realize. Also point out the loss of productivity caused by unplanned downtime of aging industrial HVAC systems can be very expensive.
- The time to save on energy is now. After sharing the facts and figures on how much more energy efficient new HVAC equipment is, it’s important to point out that increased energy efficiency saves money immediately. It’s not a benefit you have to wait for. Your customer’s utility bill could be lower next month. Reducing its carbon footprint by installing energy efficient systems is also a feather in a company’s cap that can be leveraged immediately.
- Consider the cost of financing: If interest rates increase, the TCO of a major purchase increases substantially. Remind customers that financing costs are part of TCO and putting off a purchase until tomorrow could be costly.
- Impacts of work environment: Health and comfort can affect the bottom line. These intangible components of TCO should also be mentioned. Improved air quality can positively impact health and reduce worker sick days. Increased comfort provided by a new system that better balances airflow and temperature throughout a facility could increase employee productivity.
- Reducing risk can lower costs: New HVAC systems can have an impact on insurance costs. Modernizing systems will improve air quality, and can reduce risk of fire and water damage therefore lowering insurance premiums. If a new system will improve safety, ask your customer to consult with their insurance provider, because insurance costs are also part of the TCO.
- Rebates and warranties: These can impact the TCO directly and indirectly. Rebates reduce the price of equipment immediately. Differences in what’s covered by warranty and for how long can impact the long-term cost of maintenance and repairs. Be sure customers are comparing apples to apples when calculating TCO. Many times a customer’s utility provider has rebates and/or incentives available for energy efficient equipment which is worth looking into and greatly affects TCO.
Making the Case
TCO is challenging to calculate and can vary from customer to customer depending on their needs, the type of HVAC system they are upgrading or replacing, and the layout of their facility. It is worth doing the extra homework to arrive at a close approximation, however, so a solid case for the lowest TCO can be presented to the decision makers who hold the purse strings, enabling them to make the wisest purchase for their facility.