Total Contract Value (TCV)
Definition
Total Contract Value (TCV) represents the total revenue your business might expect to earn from a customer contract over its entire duration. It includes both the recurring revenue (subscription fees) and the one-time payments (e.g. implementation fees, consultancy, custom development). TCV is used by SaaS companies to evaluate the overall monetary value of customer agreements, forecasting, and allocating resources.
Importance of Total Contract Value
While TCV is rarely considered to be the most important metric, together with other financial metrics it can provide a holistic picture of the business and guide decisions. Here's why TCV is used:
Forecasting: TCV helps businesses look beyond the usual (monthly/quarterly/yearly) reporting period.
Evaluating Sales Performance: Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR) represents the revenue you can expect in the short to medium-term. TCV provides insight into how much revenue your sales reps are generating now and for the future.
Higher Certainty: When forecasting, most companies make assumptions on future revenue. TCV represents future revenue that is already closed.
Extending Time Horizon: Reporting on TCV can extend the time horizon for your team from short-term gains to long-term profitability.
Key Components of Total Contract Value
TCV is not differentiating between recurring and one-time payments. It includes:
Recurring Revenue: Subscription fees.
Non-Recurring Revenue: One-time charges such as implementation fees, consultancy services, custom development, additional training, etc.
Full Contract Duration: TCV encompasses the revenue generated over the entirety of the contract duration.
How to Calculate Total Contract Value
The formula for calculating TCV is pretty straightforward:
TCV = (Recurring Revenue x Contract Duration) + Non-Recurring Revenue
Example Calculation:
A SaaS company signs a 3-year contract with a new client:
Recurring Revenue: $800/month
Non-Recurring Revenue: $5,000 onboarding fee and $2,000 custom development
The TCV would be: TCV = ($800 x 12 x 3) + $5,000 + $2,000 = $35,800 | This means the total value of the customer contract is $35,800.
In this example, the MRR would be $800 and the ARR would be $9,600. Only by looking at all these metrics do you get the full picture.
Special Considerations:
If discounts are applied during certain months or years, adjust recurring revenue accordingly.
Exclude variable charges like usage-based fees unless explicitly included in the contract.
TCV vs Related Metrics
Total Contract Value (TCV) is often compared with other metrics like Average Contract Value (ACV), MRR, and ARR:
ACV measures the contract value per annum, focusses on recurring revenue, and represents the average rather than a particular contract.
MRR represents the monthly recurring revenue.
ARR represents the annual recurring revenue.
Conclusion: Why Is TCV Important?
Isolated Total Contract Value doesn't tell you much, but when combined with other metrics TCV can paint the full picture of your revenue operations. TCV is essential when forecasting, measuring sales performance, and allocating resources. Bringing TCV to the forefront can even enhance and embed long-term thinking in your company culture.
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