The TCO Paradox—A Key Problem in the Diffusion of Energy Efficient Vehicles?

Abstract

The aim of this paper is to explore how mainstream vehicle buyers perceive and apply Total Cost of Ownership in their vehicle choice process. All else equal, rational consumers ought to evaluate Total Cost of Ownership in order to acquire the real cost of owning a particular vehicle under consideration, unless bounded rationality is affecting their behavior. The results reveal that vehicle buyers generally are capable of understanding the relative size of individual costs that make up vehicle Total Cost of Ownership but fail to evaluate and apply multiple costs in their vehicle purchase process. Regression analysis exposes that income, educational level, stated importance of Total Cost of Ownership and the number of vehicles in the choice set have a positive association with the degree that consumers conduct an evaluation of vehicle Total Cost of Ownership. Failure to consider Total Cost of Ownership can lead to uneconomic vehicle choices, which is here labeled as the TCO paradox. This could have an especially negative effect on the diffusion of battery electric vehicles, which require a more detailed cost analysis in order to extract its low operating cost structure.

Vehicle Residual Value Analysis by Powertrain Type and Impacts on Total Cost of Ownership

“…Vehicle purchasers do tend to be less focused on a comprehensive TCO calculation considering depreciation. A survey of respondents in Europe estimated that depreciation was the single largest cost of owning and operating a vehicle, yet only half of respondents had an approximate knowledge of depreciation rates, and only 8% planned to use depreciation rates in an ex-ante cost computation before purchase (Hagman et al 2017). However, concern about potential obsolescence of ICEVs may lead consumers to delay purchase of a conventional vehicle or to switch to an electric vehicle (Neil 2018;Huetter 2021).…”

Exploring everyday mobility in a living lab based on economic interventions

“…Many car owners only calculate operational costs, such as fuel, and disregard the car's depreciation in value, which is often the single largest cost of car ownership. A recent study shows that limited understanding of the Total Cost of Ownership (TCO) is a barrier to the uptake of electric cars [24]. In this study only 42% of potential car-buyers estimated the cost of ownership, and only 8% included depreciation of value.…”

“…Including participants with very new cars could have added other perspectives since they are generally much more expensive to own, when value deprecation is included in the cost of the car. In financial models, the depreciation-rate is commonly approximated as loosing 50% of the car's value in the first three years [26]. Information on the participants' cars can be found in Table 2.…”