Total Contract Value (TCV)

Total contract value (TCV), sometimes referred to as contract value, is a term used to describe the total amount of revenue generated over the life of a single contract. This measure includes the customer acquisition costs and the associated costs of running the contract while also assessing profitability.

TCV vs. LTV: How do they differ?

Total contract value (TCV) and customer lifetime value (CLTV) are both used to measure subscription businesses' performance. However, while CLTV measures how much money a company has earned throughout a customer's relationship with its product or service, TCV takes into account what an organization earns over the life of a contract.

While LTV is calculated using revenue predictions, TCV is based on actual recurring revenue and one-time fees, meaning that it gives a better indication of whether a business is growing or shrinking.

TCV vs. ACV: What is the difference?

The total contract value (TCV), sometimes referred to as the total contract amount, measures the overall value of a contract over the entire term. This includes both recurring and one-time payments.

The annual contract value, sometimes referred to as ACV, measures the average annual value of a single contract. This calculation excludes upfront costs such as licensing fees.

Both TCV and ACV are important figures when it comes to negotiating contracts. However, business leaders must understand the difference between one another to make sure they are getting what they want out of a deal.

Benefits of using TCV

TCV, which is based on actual bookings, aids subscription-based companies in understanding how much profit every single contract generates and where the money is spent. This means that business owners will be able to calculate their exact cost per lead and identify the channels that are assisting in their company's growth.

As a result, TCV can assist managers in making more informed decisions regarding their investment and budgeting approaches, in addition to its capacity to make accurate revenue projections.

For instance, they won't waste money attempting to turn prospects into paying customers if they discover that a particular channel isn't generating enough profit. Instead, they will focus their efforts on developing fresh marketing and sales strategies to draw in eligible buyers. TCV can therefore be used to assess the favorability of an investment.

Total contract value calculation

TCV measures the value of a single contract. This includes both one-time onboarding fees paid to enter into the contract and ongoing payments made during the term of the agreement.

The TCV (total contract value) formula is simple. It considers three variables: MRR, contract length, and contract fee.

To calculate your TCV, start by determining the monthly recurring revenue (MRR). This is the money you make per month over the course of a contract term. Next, multiply the MRR by the term length. Then add up all the one-time fees associated with the contract.

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