Home Company Blog A quick return on investment does not guarantee a low life cycle cost

A quick return on investment does not guarantee a low life cycle cost

Published: 10.11.2017 15:22 / Categories: Economy, Technology

The recent years of upheaval and price war in the lighting industry have left behind a large number of corporate casualties and great uncertainty. For lighting product manufacturers, the uncertainty manifests in the fact that energy savings are no longer a sufficient differentiating factor. The new hyped technologies, such as wireless control and adjustable white light, have also yet to convince the masses of their utility. At the same time, customers are left wondering as old lamp types disappear from the market and LED solutions are offered in their place with quality and longevity that are not easily verified. Will there be a replacement lamp or luminaire in five years, or will the whole system have to be replaced if one light breaks and the luminaire is out of production and no longer sold? What does the warranty cover?

Further uncertainty has been sown by the disappearance of traditional lamp brands from shop shelves as a result of the LED market’s recent price war. Samsung and Toshiba were among the first to give up their LED lamp business, and Osram soon joined them by selling off their lamp business to China. Former Osram lamps are now sold under the brand LEDVANCE. Buyers of lighting products now have to weigh offerings from unknown manufacturers when making their purchasing decision.

ROI as a purchasing tool
Return on Investment, ROI for short, became a key calculation tool for comparing products as LED technology took hold, particularly in purchases of professional lighting. This tool offered valuable information when upgrading from traditional lighting to LEDs. The calculation accounted for purchase price, service hours and the savings from lower energy consumption.

More advanced tools would also predict future maintenance and service costs. The problem for these calculations and the accuracy of their results was the fact that the products had much shorter lifespans and weaker performance than promised. Current LED products of at least the largest and more established manufacturers have reached a level where the figures on the packaging can be trusted, but is the ROI calculation still a relevant tool? For long-life LED products in particular, the comparison of Total Cost of Ownership or Life Cycle Cost is more productive – at least if the circumstances allow for long-term planning. The solution that is the cheapest to buy may have the quickest return on investment, but turn out to be the most expensive solution in the long term.

Life cycle cost analysis pays off
A comparison tool for lighting life cycle cost (provided by the Finnish energy efficiency agency Motiva) allows different lighting solutions to be compared using a variety of details. The tool is an impartial Excel worksheet that will unerringly calculate, based on the data provided, which solution will have the lowest life cycle cost. Anyone can use the tool to confirm that a product’s service life will be the key element in achieving a low life cycle cost. Maintenance and service costs, as well as the purchasing of new products, are unforeseen expenses that will grow more pronounced over time, and are rarely considered in the planning of a lighting purchase. These hidden costs can be avoided by choosing a long-life product. Buyers should also demand a long warranty from the seller to back up the promise of a long service life.

ROI calculations are not yet fully obsolete. If long-term planning proves impossible due to the temporary nature of the lighting need or project, a life cycle cost calculation spanning five or ten years may seem excessive – the return on investment will provide a better overview of actual cost-efficiency. If the need for lighting is expected to continue for a long time, it is generally more cost-effective to purchase a more expensive long-life lighting solution, even if a loan is required.

In addition to the Motiva tool, lighting solution life cycle costs can be compared using two different calculations. The first method is to calculate a service hour cost for the solution: all costs accrued during the solution’s service life are divided by its actual service hours in operating conditions. The second method is to choose a time window and calculate the total cost by the end of that window for each solution. Unless there is a specific reason to use the time window method (e.g. the property’s lease is up in five years), then the first method is likely to be the better one to use. When calculating life cycle cost using a time window, the same solution may win or lose depending on whether the window is set to close before or after the next product replacement. It is a commonly seen practice for sellers and manufacturers to use time window calculations where the window is as close to their product’s service life as possible. Another factor to note in calculating life cycle cost is the difference between the actual and nominal service life of a product. The service life of LED products is roughly halved every time the ambient temperature rises 10°C above room temperature (25°C). LED manufacturers generally declare the service life of their products at an operating temperature of 25°C.

The Finnish Act on Public Procurement and Concession Contracts entered into force in early 2017. The Act allows life cycle cost to be emphasised when evaluating offers and tenders. The purchase price or return on investment have previously dominated purchase decisions. However, the trend in bigger competitive tendering in the private sector and now in the public sector is to move on from ROI calculations to life cycle cost analysis.

• See the comparison between return on investment and total cost of ownership here
• More information about the effect of temperature on service life can be found in this earlier blog post.

Subscribe to our mailing list!

And get the latest blog posts to your inbox!