What is Total Contract Value (TCV)?
The Total Contract Value (TCV) represents the full value of a customer’s contract across an agreed-upon term, inclusive of all recurring revenue and one-time fees.
How to Calculate Total Contract Value (Step-by-Step)
TCV, an abbreviation for the “total contract value,” is a key performance indicator (KPI) that helps SaaS companies determine the total revenue associated with their customer contracts.
Total contract value (TCV) is the total customer commitment stated in a contract, factoring in all recurring revenue and one-time payments.
The total contract value represents a contractual commitment by the customer rather than just an arbitrary projection.
The TCV metric factors in the following:
- Recurring Revenue Sources
- One-Time Fees (e.g. New Customer On-Boarding, Cancellation Fees)
The TCV is primarily a function of the term length of the contract, which can be an agreement for a subscription or license.
The specified term length on the contract is indirectly one of the most important considerations when setting pricing for SaaS companies, i.e. the longer the term, the more favorable the pricing offered to customers.
However, SaaS companies – particularly B2B enterprise software companies – have business models oriented around maximizing recurring revenue, which can be achieved through multi-year customer contracts (i.e. customer is “locked in”).
The risk of customers churning and a company’s revenue being wiped out is substantially reduced from multi-year contracts, especially if substantial cancellation fees are included.
Total Contract Value Formula (TCV)
Formulaically, the total contract value (TCV) is calculated by multiplying the monthly recurring revenue (MRR) by the term length of the contract, and adding any one-time fees from the contract.
Unlike ACV, the TCV considers all recurring revenues plus one-time fees paid throughout the contract term, making it more inclusive.
The relationship between TCV and ACV is that ACV is equal to TCV divided by the number of years in the contract. However, TCV must then be normalized and exclude all one-time fees.