ERP total cost of ownership: a 3- and 5-year worked example with two options

Total cost of ownership (TCO) for an ERP is every dollar you will spend to choose, implement, run and eventually leave the system over a fixed horizon, usually three or five years. To calculate it: add the one-off costs (implementation, migration, integrations, training, your internal time and a contingency), then add each year's recurring costs (subscriptions, add-on apps, support) with the contract's renewal increase applied. This worked example compares two invented options for the same business so you can see how the answer changes between three and five years, and how a cheaper-looking option can still be the right or wrong choice.

This guide belongs to the ERP selection checklist series. Every figure is illustrative; none is a vendor price.

The business and the two options

A Brisbane-based wholesaler with two warehouses and 25 staff who need system access. It currently uses an accounting package with spreadsheets for stock.

Option A — SMB business-management suite: all 25 users on one per-user price; two third-party add-on apps for warehouse scanning and freight.
Option B — mid-market cloud ERP via a partner: 12 full users and 13 light users, a base platform fee, native warehouse functions, more configuration work.

Step 1: one-off costs

One-off cost	Option A	Option B
Implementation (partner statement of work)	$45,000	$95,000
Data migration	$8,000	$12,000
Integration build	$6,000	$4,000
Training	$4,000	$8,000
Subtotal of quoted one-off costs	$63,000	$119,000
Contingency at 20% of quoted one-off costs	$12,600	$23,800
Internal staff time and backfill	$20,000	$35,000
Total one-off	$95,600	$177,800

The contingency rate is a planning choice, not a statistic. See budget overruns for why it is worth holding.

Step 2: year-one recurring costs

Option A:

Subscriptions: 25 users × $110 a month × 12 = $33,000
Add-on apps: 2 × $300 a month × 12 = $7,200
Support plan: $2,400
Year-one recurring: $42,600

Option B:

Full users: 12 × $190 a month = $2,280
Light users: 13 × $45 a month = $585
Base platform fee: $800 a month
Monthly licences: $3,665 × 12 = $43,980
Connector fees: $1,200
Partner support retainer: $6,000
Year-one recurring: $51,180

Step 3: apply renewal increases

Assume Option A's contract lets the vendor raise prices at each annual renewal and the buyer budgets 6% a year; Option B has a negotiated cap of 4% a year. Apply the increase to all recurring costs from year two.

Year	Option A recurring	Option B recurring
1	$42,600	$51,180
2	$45,156	$53,227
3	$47,865	$55,357
4	$50,737	$57,571
5	$53,782	$59,874
3-year sum	$135,621	$159,764
5-year sum	$240,140	$277,207

The sums use the growing-annuity formula: year-one amount × ((1 + rate)^years − 1) ÷ rate. Check one contract's increase with the renewal uplift calculator.

Step 4: total cost of ownership

Horizon	Option A	Option B	Difference
3 years	$95,600 + $135,621 = $231,221	$177,800 + $159,764 = $337,564	B costs $106,343 more
5 years	$95,600 + $240,140 = $335,740	$177,800 + $277,207 = $455,007	B costs $119,267 more
5-year cost per user per year	$335,740 ÷ 25 ÷ 5 ≈ $2,686	$455,007 ÷ 25 ÷ 5 ≈ $3,640

Two things stand out. First, in both options the one-off costs are a large share of the three-year total (41% for A, 53% for B), which is why short horizons make complex systems look expensive. Second, Option B's lower uplift narrows but does not close the gap.

Step 5: test the assumptions that could change the answer

Forced edition upgrade. Suppose Option A's edition limits the business to one warehouse with full features, and the second warehouse forces an upgrade in year three at an extra $40 per user a month: 25 × $40 × 12 = $12,000 a year for years three to five, $36,000 in total (ignoring uplift), plus $15,000 of partner work. Option A's five-year TCO becomes $335,740 + $36,000 + $15,000 = $386,740. Still cheaper than B, but the gap shrinks to about $68,000.

Exchange rate. If Option B were billed in USD and a currency fall pushed its AUD cost up 8% in year three, that year's recurring cost would rise by about $55,357 × 8% ≈ $4,400. See USD pricing and FX.

Capability gap. If Option A cannot do something on the must-have list, such as consolidating the business's two entities, the cost of the workaround (spreadsheets, an extra app or extra staff time) belongs in A's TCO.

Benefits. TCO measures cost, not value. If B saves more staff time, the payback example may favour it.

How to build your own TCO

List one-off costs from each quote, then add contingency and internal time.
Build year-one recurring costs by user type, module and add-on.
Apply the contract's renewal mechanism year by year.
Add exit costs if you expect to leave at the end of the horizon (data extraction, parallel running). See exit planning.
Run sensitivity tests on the three assumptions most likely to be wrong.

For a quick first range, use the TCO estimator, then refine in a spreadsheet using the quote comparison method.

Frequently asked questions

Should I use a three-year or five-year horizon?

Use the horizon you expect to keep the system, often five years or more for ERP. Look at both: three years shows cash pressure, five years shows the steady state.

Should TCO include GST?

For a GST-registered business that can claim input tax credits, compare costs excluding GST. An unregistered business should include it.

Should I discount future costs?

For large decisions, a finance team may discount future cash flows. For a small business comparison, undiscounted totals with sensitivity tests are usually enough.

What about the cost of the old system?

Include any savings from retiring old subscriptions and servers in the payback calculation, and any cost of keeping the old system read-only for records.

Sources

business.gov.au — planning and budgeting for business technology
Australian Taxation Office — GST credits and record keeping
Reserve Bank of Australia — exchange rate history for FX scenarios