The Real Cost of AI: What Nobody Tells You About Total Cost of Ownership

The tool is the entry fee. The real cost is everything that happens after you swipe the card. Hello, welcome to the Readiness Report. I'm Dr.

Mike Donaldson, your host. Today, we're going to talk about the real cost of AI. Not the price on the website, not the monthly fee, the cost nobody puts in the sales deck. Owners ask, many times, what is the cost per month?

That's a fair question. But not the right question. But it's wrong. It's valuable.

The subscription fee is just the beginning. If you stop there, you're going to be surprised. And you're going to be surprised many times. Before we dive into it, take a moment to subscribe to the podcast.

You can go to ThotusAI . com. and drop me a message and I will be happy to respond and answer any questions that you have. Here's the problem that I see out there.

There is a subscription trap. The tool, it looks useful. The price seems reasonable, so you sign up. Then the real costs show up.

You have set up time, staff training, workflow rebuilds that could happen. There could be a productivity tip that's going to impact your business. You could spend hours fixing bad AI output that made it out before anyone even caught it. It got out into the wild.

There could be tool changes that are made, and interfaces that could change without warning, and now you have a rebuild cost to go back and fix everything that you did before. Or the tool shuts down or raises its prices. The cost of undoing everything built around it, if it gets too expensive, that's on you as well. None of that is on the pricing page, and all of it needs to be considered.

Now, small business owners, you cannot absorb surprises like that. You can't afford six months dealing with a new system that you implemented, that your team is trying to work. You can't absorb that cost. And even if it's just you, how much time can you spend working on a new system that has issues?

Don't have the budget cushion. Every dollar you spend on a tool must provide real value. Now there's something out there called token cost. This is tied to AI and it's based on the number of characters that AI uses.

It's a variable and it scales. What that means is the more often that you use the tool or the AI or the LLM, the higher the cost is gonna be for you. So when that bill comes, it is a surprise. That surprise is what this episode is all about.

Now, I'm not trying to scare you, not at all. I'm trying to have you go in with your eyes wide open so you fully understand how AI works, how the tools work, and you know what questions to ask so that you have the information to make the right decision. I have 20 years of manufacturing experience in operations. I use Lean extensively throughout that.

And total cost is not unit cost. My example is you have a production line and you're building widgets. A supplier comes in and they can supply you with a part that you need for your widget at a cheaper price. It's a good deal, so you move forward.

But that part doesn't fit quite right in your product, so there's a rework tie to it. There's also quality issues. You have parts that are failing. So your throughput has gone down.

What's happened is your unit cost went down. throughput dropped, and now your total cost has gone up for all of that rework you have to do in the background. That's a hidden cost. AI is the same math.

The subscription fee is your unit cost. Setup, training, the workflow redesigns, productivity loss, bad output cleanup from the AI, and that dependency, that is the total cost. Again, the tool is the entry fee. The real cost is everything that happens after you swipe the card.

Here's another example, a basic AI writing tool. There's lots of them out there. Maybe it's $10, $15 a month. Your team starts using it.

The draft, it doesn't sound like you. It doesn't sound like your brand. It doesn't sound like your company. And it doesn't sound like how you would speak to your customers.

So your team spends five to 10 minutes tweaking and adjusting every email or copy. that's being created so that it matches your company voice. Now ask yourself, how long would it take to just write the email from scratch? If the honest answer is five to 10 minutes, you're not saving time.

You're spending the same time, you also have a subscription fee, and now your team or you have a mental overload over doing every output that you don't trust from the tool. Long -term, that tool's probably gonna disappear now, and now you've got this subscription fee for a tool that nobody uses. They'll lose confidence. That is the real cost.

Most owners never stop to run the math. Now myself, I'll give you an example for me. It's a readiness question. Before I was looking at AI agents for my own work, I asked one question first.

And that is, what I have built, is it ready for this? Is it ready for AI agents? I went through my framework, I went through my processes, my data workflows, I went through everything. I wanted to know where I was starting from before I committed to anything.

And I found things, and I had to reshape my direction, correct some things, and that kept me from spending money on tools my foundation was not ready for. So you have to look at what you have set up already before you move forward with tools. I've said that before, and I'll keep saying that. You must have a solid foundation before you start buying tools and putting them on top of it.

Now where people can get this wrong is there is a broken comparison out there. Owners compare the tool to nothing. Not to a total cost of running it. They're just comparing it to not having it.

Not having it and buying it is a broken comparison. The right comparison. You look at the price, the set up fee, training, maintenance, recovery, and you compare that to what is this tool going to return to you, the ROI. That is the total cost of ownership.

That is the question worth asking. I mentioned token cost. Most owners don't know what a token is when they start, and you shouldn't have to, but it's worth knowing. It's based on usage cost, and usage cost is variable.

It scales with how often and how much you use the tool. If you build a workflow that works fantastic, it is beautiful, you love the output, the pilot is great. Then you release it and you get a bill that does not match what you were expecting. That's not a failure of the tool.

It's a failure of the expectation and the cost setting at the beginning. The conversation has to happen before you build anything around the tool. Where to start? As always, I'm going to give you an assignment.

Pick one. I'll say that a lot. Pick one. Pick one AI tool you are currently using.

Question one. Do I know what it actually costs per month? And that includes the usage -based charges. Question two.

Do I know how many hours went into setting it up? Question three. Do I know... What I would do if this tool stopped working tomorrow?

Not eventually. It shuts down at 2 a . m. What are you going to do?

If you cannot answer all three, you don't actually know what the tool costs you. That's not a criticism. It's a starting point. Now we'll move on to some other steps for you.

Step one, you need to ask for a total cost breakdown before adopting any tool. You need to ask if it's a supplier or something you're looking at. You need to ask for a monthly fee. What is it?

What are the set up time estimates? They must have implemented some place, so they have some estimates. Training time based on your employee count. How long is that going to take?

Ongoing maintenance. Are there maintenance fees? What happens if there's a change? And if the vendor cannot answer those questions, that's useful information.

Step two. If it's usage based, get a realistic estimate for what the cost could be. Now, a way that I use and many people use for getting cost estimates or time estimates is using the PERT formula. That's P -E -R -T.

In this formula, you take your worst case scenario, you add that to what you think is most likely. The most likely value multiply times four. Then you add your best case. So you've got your worst case, your foremost likely, and your best case.

Now divide by six. That will give you a realistic cost projection of what that usage base could cost you. Step three, this one gets missed a lot. You must build a recovery plan.

What if that tool breaks or goes away? If your answer is, I have no idea, you have a dependency. that you need to address. That is a lurking monster that can bite you when you least expect it.

We talked about price and cost, and those are two different numbers. Knowing both is how you make a real business decision. You have your assignment to pick one tool, answer those three questions, and write down the number and see how it all adds up. Next time, we will be talking about AI agents.

We'll take a grounded look at what they are, or what you need to have in place before you even consider implementing them. Now, take a moment. Give me a rating or review. Appreciate it.

It helps me out. It helps the podcast and it will help other people find me just like you did. I'm Dr. Mike.

Thank you for listening and have an excellent day.