Adjusting capacity to changing demand by variable speed control is known to offer efficiency improvement over classical on/off control. With a total cost of ownership analysis the economic viability of both control schemes is assessed for residential air-water heat pumps operating in different climate zones. Component sizes are optimized for both control methods individually. Results show optimal compressor displacement volumes to be smaller for variable speed than for on/off control. The optimal ratio of evaporator to condenser size is smaller for the variable speed system. Variable speed control is shown to be uneconomic for space heating in warmer climate while for average climate cost-effectiveness depends on the economic framework. For colder climate variable speed control is the more profitable choice in all considered cases; savings of up to 5000 EUR compared to on/off control can be achieved within 15 years of operation. (C) 2014 Elsevier B.V. All rights reserved.