Total Contract Value (TCV) is a means to measure the total revenue a company expects to generate from a customer contract over its entire duration. In other words, the total contract value definition refers to the potential contract-associated revenue. This revenue is generally estimated at the start of the contract.
TCV or Total Contract Value, considers all the recurring and non-recurring payments included in the contract - subscription fees, one-time fees, professional service fees, and any other charges agreed upon by both parties.
TCV is a significant metric for SaaS businesses as it helps them understand the overall value of a contract and the potential revenue it can bring. By tracking and analyzing TCV, SaaS companies can make more informed decisions on pricing, sales strategies, and customer acquisition efforts.
However, one should note that TCV is a projection that may change over time due to contract renewals, expansions, or cancellations.
Here are three reasons why SaaS companies must track TCV or Total Contract Value.
Revenue forecasting
TCV provides valuable insights into the potential revenue a SaaS company can expect from its contracts over their entire duration. By tracking TCV, businesses can accurately forecast revenue growth and make better-informed budgeting, resource allocation, and growth planning decisions.
Customer Lifetime Value (CLV) analysis
TCV enables an in-depth understanding of Customer Lifetime Value (CLV). By tracking TCV alongside other metrics like Customer Acquisition Cost (CAC) and churn rate, you can evaluate the profitability of their customer relationships and make data-driven decisions to optimize customer acquisition and retention strategies.
Pricing and sales strategy
Tracking TCV can help SaaS companies evaluate their pricing and sales strategies’ effectiveness. It allows them to identify which pricing tiers, contract types, or bundling options generate the most value. Further, you can use this information to refine pricing models and create targeted sales approaches, maximizing TCV and driving business growth.
To calculate the Total Contract Value, use the following formula,
TCV = (Monthly Recurring Revenue x Contract term length in months) + One-time fees
Here, the one-time fees include training, onboarding, professional services, set-up fees, installation fees, etc.
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