What is Lifetime Cost?

Lifetime cost is the total amount of money that a good will cost a consumer over the entire course of ownership. This included related, add-on costs such as maintenance, fuel, insurance and so on.

These costs can dwarf the actual purchase price of the item. Lifetime cost is also known as total cost of ownership (TCO), and it is a budgetary way to look at the expenses that go along with the purchase of an item.

A laser printer is a good example. The cost of the printer might be $300, and it might even come with some starter ink. Let’s say this printer is a full-color printer. The ink, when the starter ink runs out, turns out to be $70 a cartridge and the printer needs four of them to print all of the colors.

So it costs nearly as much as the printer just to replace the ink once, and the ink might need replacing a few times a year. Paper must also be purchased and power must be supplied to the machine. The lifetime cost of the printer would be significantly more than the purchase price of the item.

Compared to a cheaper printer, the ink for the larger printer might be more economical, if a lot of printing is being done. In the example of the cheaper printer, the difference between purchase price and lifetime cost would be even greater.

The same analysis can be done for buying a car, as opposed to taking public transportation, or for a more expensive hybrid or electric car compared to a car that takes gas. Lenders sometimes bring such costs into their accounting when deciding whether to make a loan to a customer, having all of the customer’s financial and income information in front of them, because they do not want the associated costs to be so overwhelming that the customer defaults on the loan.

For companies, from the reverse side, where there is a vertical integration of the parts, supplies, and services needed to maintain an item, the cumulative profit attributable to each customer over time is known as Customer Lifetime Value (CLV) or Lifetime Customer Value (LCV). Sometimes once an initial sale is made, however small, the customer is likely to make several more over time, and to potentially refer their family and friends as well.

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