Fleet operating expenses have gone up year after year and don’t look to be decreasing any time soon. This highlights the importance of having a clear understanding of all the costs associated with running your fleet, which is captured in your total cost of ownership.
Are you monitoring this critical metric for each of your vehicles? In a recent survey, we found that only 28% of fleet operators are keeping track — missing out on a powerful benchmark for managing some of the most significant and costly variables in their fleets. Make sure you’re not one of them!
In this article, we discuss how to calculate total cost of ownership and give you strategies for controlling and reducing all the numbers that go into it.
Why You Should Know Your Fleet’s Total Cost Of Ownership
Think about these stats for a moment:
- 60% of fleet-based companies aren’t aware of (or aren’t taking advantage of) the myriad ways they can improve operations with the use of rich data.
- Fleet vehicles waste 1,800 hours and 800 million gallons of diesel every year idling unnecessarily.
What operational improvements are you missing out on? How much money is your fleet wasting because your vehicles are idling unnecessarily?
The variables that go into calculating the total cost of ownership for your vehicles can tell you.
When you have the data for those variables in hand, you’ll be better equipped to make decisions that bring costs down and reduce expenses throughout your fleet.
All said and done, the point of the calculation is to show you exactly what you’re spending to operate the vehicle and show you where you might be able to cut a few dollars (or lots of dollars) here and there to make said operation less expensive.
How To Calculate Total Cost Of Ownership
One formula for calculating total cost of ownership (TCO) is:
Total Cost of Ownership = Acquisition Costs + Operating Costs + Indirect Costs (- Resale Value)
But what data falls into those categories? In other words, what makes one expense an operating cost and another expense an indirect cost? It can be hard to tell.
Here’s a breakdown of the data you’ll need and how it fits into the equation.
Data You’ll Need
Acquisition Costs
Acquisition costs include expenses such as:
- Purchase price: The initial cost of acquiring each vehicle, whether buying or leasing
- Financing: Interest on any loans or lease payments (if the vehicle is financed)
- Depreciation: The decrease in the vehicle’s value over time (typically calculated annually)
Operating Costs
Operating costs encompass a long list of numbers, including insurance, registration, licenses, permits, and depreciation, as well as things like:
- Telematics equipment installation
- Fuel and fuel tax
- Mileage-dependent maintenance (e.g., tire replacement, oil changes, brake replacement) and emergency maintenance (a vehicle breaks down unexpectedly)
- Tolls and parking fees
Basically, anything that you spend to keep your vehicles on the road falls into this category.
Indirect Costs
Indirect costs include things like:
- Downtime Costs: The price your business pays when a vehicle is out of service for repairs, maintenance, or other reasons
- Administrative Costs: Costs associated with managing the fleet, such as salaries for fleet managers, software subscriptions, or third-party services
- Compliance & Safety: Costs related to ensuring regulatory compliance and safety requirements (e.g., driver training programs or telematics subscriptions)
Resale Value And Disposal Costs
Some businesses like to include the resale value into the equation to see what the final total cost of ownership will be after they dispose of the vehicle.
Resale value will change dramatically over the life of your vehicle and is really only accurate when you’ve handed over the keys and deposited the money in your account.
That said, you can use a valuation website like Kelley Blue Book (KBB.com) to find the value of your vehicle so you can include it in your formula.
You can also subtract any costs associated with selling or disposing of the vehicle (e.g., auction fees or advertising) from the resale value to get a better idea of the total cost of ownership for that vehicle.
Keep in mind that it’s not going to help you paint an accurate picture of what you pay to operate the vehicle from year to year — it’s only going to help you see the final total cost of ownership when you’re finished with the vehicle.
What You’ll Do
A simple way to start calculating fleet total cost of ownership is to list all your costs in a spreadsheet.
Once you’ve gathered all your costs, add them all together to get a total. You’ll wind up with four totals that correspond to the four categories we mentioned earlier in this article.
With those totals in hand, you can plug them into this equation:
Total Cost of Ownership = Acquisition Costs + Operating Costs + Indirect Costs (- Resale Value)
This will show you the total cost of ownership for a specific vehicle.
Example Calculation
Timeframe: Five years
Data:
Acquisition Costs = $72,000
Operating Costs = $144,000
Indirect Costs = $100,000
Resale Value = $15,000
Total Cost Of Ownership:
Total Cost of Ownership = Acquisition Costs + Operating Costs + Indirect Costs (- Resale Value)
Total Cost of Ownership = $72,000 + $144,00 + $100,000 – $15,000
Total Cost of Ownership = $301,000
What To Do Next
Analyze The Fixed And Variable Costs In Detail
Once you’ve got your TCO numbers in hand, go back through the fixed and variable costs and think about ways that you can reduce spending for each category.
For example, can you negotiate lower insurance premiums to bring your fixed costs down? Or, can you implement better procedures (e.g., driving techniques, routing and dispatch, etc.) to reduce fuel use and lower fuel costs?
Analyzing the fixed and variable costs associated with each vehicle can help you identify areas of operation that you didn’t know were costing you extra money.
Calculate Vehicle Cost Per Mile
After calculating Total Cost Of Ownership, you can use that number to calculate Vehicle Cost Per Mile (VCPM). The formula you’ll use is:
Vehicle Cost Per Mile = Total Cost Of Ownership / Total Miles Driven
Here’s an example calculation:
Timeframe: One year
Data:
TCO = $216,000 per year
Total miles driven for that month = 180,000
Cost Per Mile:
Vehicle Cost Per Mile = Total Cost Of Ownership / Total Miles Driven
Vehicle Cost Per Mile = $216,000 / 180,000
Vehicle Cost Per Mile = $1.20
With these numbers in hand, you can start thinking about ways to change the variables that go into the calculation — either in the TCO itself (as mentioned in the previous section) or in the total miles driven — to reduce costs and make the final numbers smaller.
Let’s take a look at some strategies for spending less in your fleet.
Strategies For Reducing Total Cost Of Ownership
Monitor Fuel Expenses With A Smart Fuel Card
When it comes to reducing the numbers in your TCO calculation, monitoring and controlling fuel costs is one of the most important things you can do.
Smart fuel cards give you a wide variety of tools to help you lower expenses, including:
- Wide acceptance and advanced spending control
- Real-time reporting
- Security alerts
- Integrations with other fleet technology
Optimize Routes With Fleet Management Technology
The fewer miles your vehicles travel, the less you’ll spend on fuel and the lower both your TCO and VCPM will be.
Fleet management technology such as telematics, GPS, fleet management software, and smart fuel card software combine to give you a 360° view of your fleet activities and reveal the information you need to optimize routes for better fuel use and less vehicle wear and tear.
With the right combination of software, you may even be able to implement dynamic, real-time routing — adding new destinations to the routes of vehicles already in the field based on proximity and expected job completion time — for even more savings and fewer miles driven.
Make Fuel-Efficient Driving Techniques Mandatory
Another great way to reduce total cost of ownership is to make fuel-efficient driving techniques mandatory.
Such driving techniques include:
- Smooth acceleration
- Smooth (and early) braking
- Setting the cruise control whenever possible
- Maintaining the posted speed limit
- Inefficient (or detrimental) shifting
- Reducing weight carried in the vehicle
It may take some training (and time) for these techniques to have an impact on the numbers in your TCO, but the lower costs that ultimately result are well worth the effort.
Get Control Of Your TCO With Coast
A lot of different numbers are necessary for calculating an accurate TCO, and some of them can be difficult to get right.
Coast can help.
With the Coast smart fuel card, you get precise fuel consumption data, including detailed information for each transaction as well as intuitive charts that can help you get visibility into your fuel spend (by both vehicle and driver).
Add to that the ability to make maintenance-related purchases with the Coast smart fuel card and you can get a full picture of many of the operating costs that often get left out of the TCO equation.
Coast also integrates with Fleetio fleet management software to help you sync fuel and maintenance transaction information with the rest of your fleet data so you can centralize all your fleet cost data in one place.
That’s what Leros Transportation Group did to consolidate and streamline its global operation in 700 cities across four continents.
“The utilization of Fleetio and Coast has really given us visibility into our fleet like we’ve never had before, because it now allows us to take all of our information and look at it in one system with Fleetio,” says Jeff Cartagena, Executive Vice President at Leros.
“Our whole business is run on data analytics — everything is based on metrics. And then we take that information and we make ourselves better.”
With Coast and Fleetio powering their fleet data, Leros is able to quickly identify trends in their fleet in real time and apply those learnings to their operation.
Fleet data quality is at the heart of Coast’s approach, enabling users to focus on growing their businesses, rather than fixing data issues. These features ensure you can maintain accuracy in your fleet data and calculate the most accurate TCO possible.
Ready to give Coast a try? Get started here.
For more help with all aspects of running your fleet-based business, visit our resource center on CoastPay.com.
