What is TCV (total contract value)?

Total Contract Value (TCV) is how much a deal is worth over its life. It includes how much money the deal is expected to bring in immediately and how much it might bring in later on if it is renewed or expanded.

Companies that sell subscriptions use TCV to figure out how much their contracts are worth so they can make better decisions and predict their income.

Companies can find growth opportunities and change prices to get the most out of them by figuring out TCV.

Businesses take into account both the expected yearly contract value (ACV) and the customer lifetime value when they figure out the total value of a contract.

Customer lifetime value (LTV) is the net present value of all future retained profits over the course of a deal. Annual revenue is a business’s money from customers in a given year.

These numbers come from averages of past results and data from the industry.

The total contract value, as opposed to yearly recurring revenue (ARR) and monthly recurring revenue (MRR), includes extra services and subscription renewals that may make the deal more valuable over time.

Synonyms

• Customer Lifetime Value (CLV): The total revenue predictions of a customer throughout their agreement.
• Annual Contract Value (ACV): The revenue generated by an agreement in any given year.
• Predictable Revenue: Revenue that can be reliably forecasted throughout an agreement.
• Subscription Value: The total value of subscription-based services over some time.

The total value of services you pay for overtime is called the membership value.

Contract Value (ACV) vs. Total Contract Value (TCV)

There are some differences between TCV and ACV, even though both are essential parts of any business deal.

This number tells a business how much money it can make during the current deal term.

The total contract value, on the other hand, looks at bigger, longer-term goals like the customer renewal rate and the customer lifetime value. It also looks at how much money is expected to come in from any possible renewals or growth.

The difference between ACV and TCV can be noticeable when looking back at data for reporting reasons.

For instance, the ACV of a one-year contract is the amount of money that deal brings in each year, while the TCV takes into account all possible extensions and renewals.

TCV looks at long-term value, while ACV only looks at average profitability over a shorter contract (one year).

ACV is best used to judge the success of current marketing and campaigns because it doesn’t consider one-time fees. TCV is a better way to determine how well a contract strategy will work in the long run.

Whole-Life Value (CLV) vs. Total Contract Value (TCV)

Total contract value (ACV) and customer lifetime value (CLV) are similar, but the two have a key difference.

TCV is a way to figure out how much money a single deal brings in over its lifetime. Customer lifetime value is the average amount of money each customer brings in over time, considering any possible refills or growth.

To put it another way, TCV shows how profitable one deal is thought to be, while CLV shows the customer’s total value, taking into account all of their possible income streams.

It’s important to remember that these terms have different roles in revenue management, even though they sound similar and are sometimes used equally.

For example, a software-as-a-service (SaaS) business that wants to try out new pricing strategies or marketing channels should use TCV to determine how much money each contract could bring in at each price point and marketing channel.

In the same case, CLV can be used to find ways to make money through upsells, renewals, and other forms of inside sales.

Why Total Contract Value (TCV) Is Important

If your business works with subscriptions, TCV gives you a more accurate picture of how much an agreement is worth than just ACV.

You can’t accurately predict long-term income or make intelligent choices about contract terms without considering renewals and possible expansions.

Trying to Guess the Revenue

A key part of revenue management is being able to predict income. Keeping customers is more important than ever in the subscription economy. Knowing the total value of each deal can help you find new ways to get and keep customers.

Even though customer acquisition costs can give businesses a good idea of customer lifetime value, TCV is the best way to measure individual customer revenue streams.

Making a budget

A big part of how companies decide where to put their money is knowing how much their contracts are worth.

Businesses can use TCV to understand their budgets better and choose where to spend their money.

Companies can better decide how much they are willing to risk to get new customers or keep old ones by figuring out the estimated total contract value.

Aiming for Channels

There are so many ways to sell that getting new customers can be costly, and it’s not always clear which ones work best.

Companies can figure out which marketing and sales outlets bring in the most money by adding more of the ones that work best when they add up the total contract value.

How to Figure Out the Total Value of a Contract

Four things are used to figure out TCV:

Monthly Revenue Per Customer:

This is how much money you expect or make from each customer monthly.

Contract Lengths:

To get an idea of how much each deal will cost, multiply your MRR by the length of the contract.

When you renew your contract, many companies offer discounts. If this is the case, you should take these prices into account when you do the math.

Fees that only happen once: Any one-time fees or setting costs should be added to the total.

The formula for the Total Contract Value

Here is the formula for TCV:

$500 x 12 months + 0 (no renewal rates) + $99 (one-time setup fee) = $6,099 TCV.

Take the case of a company that charges $500 a month for a yearly subscription. There would be no renewal fees, so the deal’s total value would be $500 times 12 months plus $99 for the setup fee. This comes to $6,099 TCV.

How to Increase TCV (one way should be to use technology like CPQ and subscription management tools)

One way for a business to stay healthy in the long run is to increase the total value of its contracts. There are several ways to raise TCV, such as:

Offer incentives for longer contract terms

MRR doesn’t fully show how much money a company will make throuecause it doesn’t take intconsiders.

Companies can get more money from their contracts by changing the terms of future contracts to lock in a longer length. They can also get customers to sign more extended contracts by giving them deals or unique benefits, like beta software testing, free add-on features, and so on.

Find the best prices.

Companies can also raise the total value of their contracts by making their pricing methods more efficient.

Companies can ensure they are charging the right amount of money while still making the most money by knowing what their customers want and how much they have to spend.

One way to do this is to set different levels of price for different services or levels of access. Companies can get both high-value and low-value users this way.

Find new ways to make money.

Because TCV takes into account both ongoing and one-time income, businesses can raise the value of their contracts by creating new goods or services that bring in more money.

Businesses can also offer more services by partnering with other companies to offer connected services.

The “freemium” business model is one of the best ways to do this. With this model, you give away the basic version of the product for free and charge more for extra benefits.

Use technology to make the process easier.

Many tools can help businesses handle their marketing and sales tasks and make more money.

CRM software is one of the best ways to keep track of leads and sales prospects, manage relationships with customers, and look at customer data.

Companies can keep track of their recurring income with the help of a subscription management tool that handles billing and management of subscriptions automatically.

These tools can help lower the monthly churn rate by making the general customer experience better. This will raise the total contract value.

CPQ software can quickly make and send quotes for companies with complicated pricing plans. This lets businesses ensure customers get a deal with the right price and terms.