Total Cost of Ownership: SaaS vs Custom Software
Subscription fees are just the beginning. Here's how to calculate what software really costs your business over 3-5 years.
When comparing SaaS to custom software, most people compare the sticker price: $50/user/month vs a $50,000 development project. But sticker price tells you almost nothing about what the software will actually cost your business over its useful life.
Total Cost of Ownership (TCO) includes everything: licensing, development, customization, integration, training, maintenance, hosting, opportunity costs, and the cost of eventually switching when you outgrow it. This guide gives you a practical framework for calculating TCO so you can make an informed decision.
SaaS TCO: More Than the Subscription
SaaS pricing looks simple: per-user, per-month. But the real cost includes layers of hidden expenses that add up significantly over time.
Tier upgrades are the biggest hidden cost. You start on the basic plan, then need SSO ($$$), audit logs ($$$), API access ($$$), or priority support ($$$). Enterprise tiers can cost 3-5x the listed starting price. HubSpot's Marketing Hub goes from $20/month to $3,600/month for the same product at different tiers.
Integration costs are another hidden line item. Most SaaS tools need to connect to other systems, and those integrations require development time — either through an iPaaS like Zapier (another subscription) or custom integration code. The irony of SaaS is that you often need custom development to connect your off-the-shelf tools.
Subscription Fees
Per-user/month × users × 12 months × years. Don't forget annual increases (typically 5-10%).
Tier Upgrades
You'll need enterprise features eventually. Budget for 2-3x the starting price within 18 months.
Integration Development
Custom API integrations, Zapier/Make subscriptions, middleware. $5K-30K is typical.
Workaround Engineering
Developer time spent working around platform limitations. Often 20-40% of engineering capacity.
Custom Software TCO: Front-Loaded but Predictable
Custom software has a higher upfront cost but much lower ongoing costs. The development cost is a one-time investment, and you own the result. No monthly licensing, no per-user fees, no surprise tier upgrades.
Ongoing costs include: hosting ($50-500/month depending on scale), maintenance and updates (typically 15-20% of build cost annually), and potential feature additions. These costs are predictable and scale with usage, not headcount.
The key insight: custom software costs don't increase when you add users. Adding 50 more users to your custom tool costs almost nothing in infrastructure. Adding 50 users to your SaaS tool costs $2,500-5,000+ per month in new licenses.
The Breakpoint: When Custom Becomes Cheaper
For most categories of business software, custom becomes cheaper than SaaS at around 25-50 users, with a break-even period of 18-30 months. Here's a concrete example:
Scenario: internal tools for a 50-person team. SaaS option (e.g., Retool Business): $50/user/month = $30,000/year. Over 3 years: $90,000 in licensing alone, plus $15,000 in integration work and $30,000 in developer workaround time. Total 3-year TCO: ~$135,000.
Custom option: $45,000 build + $2,400/year hosting + $9,000/year maintenance. Total 3-year TCO: ~$79,200. And you own it — no ongoing licensing, no vendor lock-in, no per-user fees. The 50-person team would save ~$56,000 over three years while getting software that's purpose-built for their needs.
How to Calculate Your Own TCO
Here's the framework we use with clients. For SaaS: (subscription × users × 36 months) + (estimated tier upgrades) + (integration development) + (developer workaround time × hourly rate) + (training for new features/changes) + (estimated switching costs when you outgrow it).
For Custom: (build cost) + (hosting × 36 months) + (maintenance × 36 months) + (estimated feature additions over 3 years). The result almost always favors custom for teams over 25-30 users, and dramatically favors custom for teams over 100 users.
The one variable that's hard to quantify but often the most significant: opportunity cost. What features aren't you building because your SaaS tool can't support them? What customers are you losing? What processes are inefficient because the tool doesn't match your workflow? These costs are real even if they're hard to put a number on.
Frequently Asked Questions
Does custom software TCO include the cost of bugs and fixes?
What about the cost of hiring developers to maintain custom software?
SaaS gives us constant updates and new features. Doesn't that add value?
Want a Custom TCO Analysis?
We'll calculate the real cost comparison for your specific tools and team size. Book a free consultation — we'll bring the spreadsheet.