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What is total contract value (TCV)

Total contract value (TCV) is a SaaS metric that is used to measure the total revenue a contract will generate over its term. This metric is typically used by businesses that offer subscription-based services or products. TCV is important because it measures the amount of business or revenue that a company is legally obligated to receive in the future. It is also often used to determine commission payments for sales professionals. Unlike metrics like MRR and ARR, TCV is affected by the duration of a contract.

How to calculate TCV

A graphic showing the formula for total contract value (TCV).
TCV Formula

TCV is calculated by multiplying the contract length (in months) by the total value of all payments that a customer will make during the contract, including any one-time fees, recurring payments (MRR in this case), and any other additional services or products that the customer may purchase. This allows businesses to get a more accurate picture of the overall value of a contract, rather than just looking at the initial payment or monthly subscription cost.

TCV when it comes to contract renewals and sales

TCV is an important metric for businesses that use subscription-based models, as it allows them to better understand the potential value of each customer. For example, a company may notice that customers with a higher TCV are relatively cheaper to acquire than customers with similar recurring revenue profiles, and more likely to renew their contracts and make additional purchases, indicating that they are more valuable to the business.

Additionally, TCV can be useful for calculating sales commissions and tracking the performance of different sales teams or channels. By comparing the TCV of contracts acquired through different sales channels, businesses can identify which channels are most effective at generating high-value contracts.

This information can then be used to optimize the sales strategy and focus on channels that are most likely to produce high-value customers.

Conclusion

Overall, TCV is a valuable metric for businesses that use subscription-based models. By providing a more comprehensive view of the value of each contract, TCV can help businesses better understand the potential value of their customers and make more informed decisions about their sales and retention strategies.