TCO, instructions for use: controlling entry costs

In fleet management, one indicator frequently discussed is the TCO (Total Cost of Ownership). The automotive TCO represents the sum of all costs associated with owning a vehicle or an entire fleet. It is a key KPI, essential for tracking and controlling the cost evolution of a fleet while also comparing different models in terms of financial burden to guide decision-making.

For both beginners and experienced fleet managers, the question remains: how can the TCO be effectively managed and optimized?

To address this, it is essential to understand the different cost components of the TCO, which we have divided into five categories:

• Entry costs
• Exit costs
• Tax and insurance fees
• Maintenance and repair costs
• Energy costs

This article examines the structure of entry costs, meaning those related to the acquisition of a company or service vehicle. Here’s how to manage and reduce them.

1. Properly Sizing Your Fleet

Analyzing driver travel patterns, particularly for service cars, can reveal unexpected insights: some vehicles are underutilized!

Instead of maintaining and financing an underused vehicle, consider alternative solutions, such as:

• Short-term rentals for occasional needs
• Acquiring bicycles or electric-assisted bikes for short trips
• Encouraging employees to use their own vehicle for occasional short journeys with reimbursement

Understanding employees’ driving and travel habits is key. A telematics tool can provide usage statistics. Among them, CarFleet by Echoes stands out by using data natively transmitted by the vehicle to the manufacturer. No need to purchase, install, configure, and then uninstall a tracking device—saving both time and money! Moreover, vehicle-transmitted data enables CarFleet to collect far more precise information than a GPS tracker regarding average speeds, driving style, and soon, vehicle occupancy rates.

2. Choosing the Right Models

To reduce entry costs for necessary vehicles, the most effective approach is often to opt for lower-tier models. Do all employees truly need an SUV or a large sedan? Such choices may not be relevant for those who mainly drive in urban areas, take short trips, or travel alone most of the time. Once again, a fleet monitoring tool like CarFleet can help you better understand:

• Each user’s driving habits
• The usage statistics of each vehicle

These insights allow you to tailor the vehicle segment and engine type to actual usage.

Surprisingly, moving to a lower-tier model is not always beneficial, particularly in lease agreements like a LOA (Lease with Option to Buy). In this financing model, where only the depreciation over the lease term is paid by the client, the vehicle’s value loss significantly impacts monthly payments. As a result, within the same segment, a premium-brand vehicle—despite a higher purchase price—may result in lower leasing costs due to lower depreciation. Make sure to carefully compare offers.

3. Selecting the Right Acquisition Method

When acquiring a vehicle, two primary scenarios arise:

• Direct Purchase: Still common among rental companies and small business fleets. The total cost is calculated by subtracting the vehicle’s residual value at the end of its usage from the purchase price. If financed via a loan, interest costs must also be considered.
• Leasing (Short- or Long-Term) or Lease-to-Own (LOA/Lease Financing): Increasingly popular, these options allow companies to spread acquisition costs through fixed monthly payments. These contracts often include services such as maintenance, insurance, and roadside assistance.

The choice between these options depends on a company’s accounting policy and habits. For SMEs, a comparison table can help clarify the best approach. Generally, leasing suits businesses needing new vehicles without resale concerns, while loans remain more cost-effective for long-term vehicle retention.

4. Financing: Competitive Bidding is Key

Comparing offers is crucial for saving money—not only for vehicle models but also for leasing deals! Manufacturer financing through dealerships can be attractive, but also consult your bank and independent leasing companies.

For auto loans, particularly for SMEs, interest costs can be significant, especially given rising rates post-2022. Online comparison tools can help find the best rates and encourage competition between financial institutions. Also, keep in mind that shorter loan durations and higher down payments generally lead to lower interest rates, so adjust according to your cash flow capacity.

Conclusion

While negotiating better financing conditions can help reduce entry costs, remember that the cheapest vehicle is the one you don’t need to acquire. Tracking driver usage habits with a tool like CarFleet will allow you to optimize your fleet’s size and model selection, ultimately lowering your TCO.