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TCO: A Guide to Managing Initial Costs

When it comes to fleet management, one metric comes up very frequently in discussions and publications: TCO. Short for Total Cost of Ownership, TCO in the automotive context refers to the sum of all costs associated with owning a vehicle or a fleet. It is an essential KPI, both for tracking and controlling changes in fleet costs and for comparing different models in terms of financial burden and guiding decision-making.

Whether you're a newcomer or an experienced manager, it's only natural to wonder how best to manage and optimize your TCO.

To answer these questions, we first need to understand what the TCO consists of. We have divided these into five categories:

  •       entry costs
  •       exit costs
  •       tax and insurance costs
  •       maintenance and repair costs
  •       energy costs


In this article, let’s examine the structure of upfront costs—that is, those associated with acquiring a company or company car. Here’s how to manage and reduce them.

1. Ensure your fleet is the right size

Analyzing drivers' trips—especially for company cars—can reveal some surprises: some vehicles are hardly ever driven!

Rather than keeping an underutilized vehicle in your fleet and continuing to pay for it, it may be worth considering alternatives, even if that means bringing the topic up with your employees. These alternatives include:

  • Short-term rentals, for occasional needs
  • The purchase of bicycles or e-bikes to meet the needs of short trips
  • Offer certain employees the option of using their own vehicles for occasional short trips, in exchange for reimbursement


The next step is to understand employees’ travel and driving habits. To do this, a telematics tool can be used to generate usage statistics. Among these, Echoes’ CarFleet tool stands out because it uses data transmitted directly by the vehicle to the manufacturer. No need to buy, install, configure, and then uninstall a device—that’s a significant savings in both time and money! Better yet, the data transmitted by the vehicle allows CarFleet to collect much more precise information than a GPS device, in terms of average speeds, driving style, and soon, vehicle occupancy rates.

2. Choosing the Right Models

Nevertheless, to lower the upfront cost of the vehicles your company actually needs, the most effective approach is still to opt for a lower-end model. Do all your employees need an SUV or a large sedan? Such a choice isn’t necessarily appropriate for a driver who only drives in the city, makes short trips, or travels alone most of the time. Here again, a fleet management tool like CarFleet will help you better understand: 

  • each user's driving habits
  • usage statistics for each vehicle

This data will help you tailor the vehicle segment and powertrain of your next vehicle to its intended use.

Contrary to popular belief, it isn’t always wise to opt for a lower-end model, especially when financing a vehicle through a lease-to-own agreement: under this financing method, where the customer only pays for the vehicle’s depreciation over the term of the contract, the vehicle’s loss of value has a significant impact on monthly payments. Thus, within the same segment, a premium-brand vehicle—even though it is more expensive to purchase than a mainstream brand—can result in lower monthly payments, since its depreciation is lower. Be sure to compare offers carefully.

3. Choose the right acquisition method

When it comes to buying a vehicle, there are two scenarios:

  • Purchasing in one’s own name, which remains common among rental companies and small commercial fleets. The total cost of this item is calculated by subtracting the vehicle’s estimated residual value at the end of its ownership period from the purchase price. Interest costs are added to this amount if a loan is involved.
  • Long-term or short-term rentals, or lease-to-own arrangements, are becoming increasingly common. These options, in which the vehicle is not owned by the company, allow the cost of acquiring a vehicle to be spread out over the term of the contract in the form of a fixed monthly payment. The contract may include various services, such as maintenance, insurance, and roadside assistance.

The choice between the two options may depend on the company’s accounting policies or practices. For a small business, it’s understandable to be unsure, and a comparative calculation table can help clarify the situation. Generally speaking, leasing is a good fit for companies that need vehicles that are always up-to-date without having to worry about resale. Conversely, financing remains more financially advantageous for vehicles intended to be kept for a long time.  

4. Financing: Promoting Competition

Comparing offers is the key to saving money—and not just when it comes to vehicle models; the same goes for leasing deals! Offers from manufacturers available at dealerships may be tempting, but don’t hesitate to also reach out to your bank and leasing companies that are independent of the manufacturers.

When it comes to car loans, especially for small and medium-sized businesses, interest can be a significant expense. This is even more true since interest rates skyrocketed after 2022. Don’t hesitate to use online comparison tools to find the best rates, and consider shopping around to see if your own bank can match them. Also, keep in mind that rates will be lower the shorter the loan term and the larger the down payment—factors you should calculate based on your cash flow.

Conclusion

While negotiating better financing terms can help reduce your initial costs, remember that the cheapest vehicle is the one you don’t need to buy. By monitoring your drivers’ usage patterns now—using a tool like CarFleet—you’ll likely be able to adjust the size of your fleet, both in terms of the number of vehicles and the choice of models.