Total Contract Value: What is TCV and how to calculate it
What is Total Contract Value?
Total Contract Value (TCV) measures the total revenue that can be derived from a customer’s contract over its entire duration, including recurring fees, one-time charges, and any upsells or add-ons.
When comparing TCV to Annual Contract Value (ACV), which represents the average revenue generated from a customer’s contract within a single year, TCV offers a more comprehensive view of the long-term value of the total contract. While ACV focuses on annual revenue, TCV provides insights into the overall revenue potential throughout the contract’s duration.
It is important not to confuse TCV with Customer Lifetime Value (LTV), which calculates the total value a customer brings to a business over their entire relationship. TCV measures the value of a specific contract, whereas LTV considers all contracts a customer may have over their lifetime.
Understanding TCV is crucial for businesses as it aids in revenue forecasting, evaluating the effectiveness of sales efforts, and making strategic decisions. By calculating TCV, businesses can identify opportunities to increase contract value and optimize pricing strategies.
In the following sections, we will explore the key differences between TCV and ACV, as well as TCV and LTV. Additionally, we will discuss the importance of TCV and provide insights on calculating and improving it for your business.
Calculating TCV and Examples
Total Contract Value refers to the total amount of money a customer pays over the lifetime of their contract with your business. When calculating TCV, you’ll include the recurring revenue from a contract as well as any additional, one-time fees.
For clarity, let’s look at an example before moving on to show you how to calculate TCV for your business.
Let’s say you’re a business that needs a subscription for a new project management software. So, you sign up for a 3-year contract for software that costs $650 per month. When you sign up, you also have to pay an onboarding fee of $500 and decide to buy an add-on service to the software for a flat fee of $1200.
The total value of your contract with this software company would be $25,100. How did we get that number? Easy. Just follow the formula in the next section.
How to Calculate Total Contract Value
To calculate TCV, all you have to do is use this simple formula:
TCV = MRR x Number of Months the Contract Is Effective + One-Time Fees
So, going back to our example in the previous section, we can calculate $2,510 by applying the TCV formula like this:
$25,100 (TCV) = $650 (monthly fee) x 36 (months) + $500 (onboarding fee) + $1200 (add-on fee)
To streamline the process of calculating TCV, businesses can leverage tools and methods specifically designed for this purpose. Subscription management platforms, like Zuora, offer features that automate the TCV calculation process, reducing manual effort and increasing accuracy. These tools enable businesses to easily track and manage recurring charges, one-time fees, and any modifications to the contract. Furthermore, advanced reporting capabilities provide valuable insights into the TCV of individual contracts, customer segments, or the entire subscriber base.
Common mistakes when calculating Total Contract Value
Calculating Total Contract Value (TCV) may seem straightforward, but there are several common mistakes that can lead to inaccurate projections. Here are some of the most frequent errors businesses make when calculating TCV and tips to avoid them:
1. Ignoring One-Time Fees
Mistake: Focusing only on recurring revenue and forgetting to include one-time fees like setup or onboarding costs.
Solution: Always add one-time fees into your TCV calculation to get a full picture of a contract’s total revenue potential.
2. Misinterpreting Contract Length
Mistake: Using an incorrect contract term, especially if the agreement includes an automatic renewal or has a flexible term.
Solution: Double-check contract terms and confirm whether the TCV should cover the initial term, full length, or include renewals.
3. Overlooking Add-Ons or Upgrades
Mistake: Not factoring in optional services or upgrades purchased during the contract, which can inflate TCV.
Solution: Include all potential add-ons, service upgrades, or customization fees in your TCV calculation.
4. Not Accounting for Discounts or Promotions
Mistake: Calculating TCV based on full price, without accounting for discounts given as part of the sales agreement.
Solution: Ensure all discounts and promotions are included in your calculations for an accurate TCV figure that reflects actual revenue.
5. Misusing TCV with Other Metrics
Mistake: Confusing TCV with similar metrics like Lifetime Value (LTV) or Monthly Recurring Revenue (MRR), leading to inconsistent projections.
Solution: Be clear on when to use TCV versus other metrics, as TCV represents a contract’s total value rather than monthly or long-term lifetime revenue.
Total Contract Value vs. other revenue metrics
Total Contract Value (TCV) is an important metric in subscription-based and contract-driven businesses. However, it’s not the only metric that businesses rely on to assess revenue and growth potential. Here’s how TCV compares to other key metrics like Annual Contract Value (ACV), Monthly Recurring Revenue (MRR), and Gross Contract Value (GCV), and when each metric is most useful.
TCV vs. Annual Contract Value (ACV)
Annual Contract Value (ACV) measures the average annual revenue a customer generates over a contract period. Unlike TCV, which calculates the total value of a contract over its entire duration, ACV breaks this down into annual increments. Here’s how these metrics differ in usage:
Use TCV when: You need to understand the total value of a contract, especially for forecasting long-term revenue and planning budgets. TCV is most useful when evaluating the lifetime revenue potential of a single contract, including one-time fees and additional charges.
Use ACV when: You need a year-over-year view of revenue, especially to track recurring income more consistently across different contracts. ACV is ideal for shorter-term revenue goals and assessing annual revenue trends across customers.
For example, if you sign a three-year contract with a TCV of $36,000, the ACV would be $12,000. TCV provides the comprehensive contract value, while ACV helps break it down to track annual performance.
TCV vs. Monthly Recurring Revenue (MRR)
Monthly Recurring Revenue (MRR) is the consistent monthly revenue from subscriptions or contracts. Unlike TCV, MRR only considers recurring monthly payments and doesn’t include one-time fees or varying contract lengths. Here’s a breakdown of when each metric is most relevant:
Use TCV when: You want to assess the complete value of a contract, especially if it includes one-time fees or variable add-ons. TCV is a better metric for understanding the overall customer value, factoring in all costs over time.
Use MRR when: You need to track regular monthly income, measure growth trends, and make quick adjustments in marketing or sales strategy. MRR is useful for tracking performance in real-time and comparing month-over-month growth rates.
For instance, a contract with a $1,000 monthly subscription would have an MRR of $1,000, regardless of the contract’s length or additional fees. TCV, however, could be much higher if the contract includes annual renewals, setup fees, or additional services.
TCV vs. Gross Contract Value (GCV)
Gross Contract Value (GCV) is the total value of a contract without considering any potential discounts or churn. Unlike TCV, which accounts for revenue lost from potential cancellations or discounts given, GCV is a straightforward total contract amount. Here’s when each metric is more applicable:
Use TCV when: You need an accurate measure of the total expected revenue, accounting for discounts, promotions, or customer churn. TCV reflects the realistic revenue potential of a contract after these factors.
Use GCV when: You’re assessing the theoretical or maximum revenue value of a contract, especially for high-level financial forecasting or to evaluate unadjusted contract sizes across segments.
For example, a contract worth $50,000 with a 10% discount applied would have a TCV of $45,000 but a GCV of $50,000. GCV gives insight into the raw value of contracts, while TCV provides a more practical projection of actual earnings.
TCV vs. Lifetime Value (LTV)
Lifetime Value (LTV) estimates the total revenue a customer could generate over their entire relationship with a business, accounting for renewals and customer loyalty. TCV, however, is specific to a single contract’s value, not the entire customer lifespan. Here’s how to decide between these metrics:
Use TCV when: You’re calculating the expected revenue for a particular contract, such as for sales quota setting or specific financial forecasting tied to contract terms.
Use LTV when: You need to measure the potential long-term value of customer relationships, especially for customer retention and loyalty initiatives. LTV is a broader metric for understanding the cumulative value a customer can bring over time.
For instance, a customer with multiple contracts over several years might have a high LTV but a relatively lower TCV for each individual contract. LTV helps you understand total customer profitability, while TCV is best for evaluating individual contracts within that relationship.
| Metric | Description | Best Used For |
| TCV | Total revenue from a contract over its full term, including one-time fees. | Long-term revenue forecasting, sales quota setting. |
| ACV | Annual revenue from a contract, breaking down TCV yearly. | Year-over-year revenue tracking and comparisons. |
| MRR | Monthly recurring revenue, excluding one-time fees. | Month-over-month growth tracking, short-term metrics. |
| GCV | Gross contract value before discounts or churn. | Evaluating raw contract sizes, high-level planning. |
| LTV | Total revenue expected from a customer over their lifespan. | Customer loyalty and retention strategies. |
When to Use TCV to Make Important Business Decisions
Now that you know what Total Contract Value means, the TCV formula to calculate it, and how it’s different from other important metrics, let’s look at how you can use it to grow your business.
Here are a few examples of key business decisions that can be informed by Total Contract Value:
Revenue forecasting: TCV is an effective method for forecasting revenues and growth based on real sales.
Revenue recognition: TCV can help you make sure that you’re accounting for all of your subscription revenue when making decisions based on projected revenue.
Marketing budget: TCV can give you a better understanding of what effect your marketing channels and campaigns have on growth, helping you decide how to best allocate your marketing budget.
Customer acquisition costs: You can use TCV to get a more accurate measurement of your customer lifetime value and how much you can spend to acquire new customers.
Customer segment comparison TCV can be used to compare customer segments to see which ones are more valuable to your business. You can then focus more of your marketing efforts on these particular customer segments to increase your chances of retaining your most valuable customers.
Subscription mix: You can use TCV to see if it would be more valuable for your business to focus on selling more of one type of subscription rather than another.
Sales pipeline analysis. You can use TCV to evaluate the effectiveness of your sales pipeline, allowing you to optimize your sales process and identify any bottlenecks.
Sales quotas: You can use TCV to help you establish sales quotas and ensure that your sales team is focused on acquiring customers that bring the most value to your business.
Commission plans: You can also use TCV to design effective commission plans for your sales team and ensure your sales team is adequately incentivized to sell the services that generate the most revenue for your business.
Improving TCV for Your Business
Increasing the Total Contract Value (TCV) is a key goal for businesses looking to maximize their revenue and profitability. By implementing the right strategies, optimizing pricing models, and leveraging upselling and cross-selling techniques, you can significantly boost your TCV.
Below are some strategies to increase your TCV.
Customer Retention. By providing exceptional customer service and continuously delivering value, you can increase customer satisfaction and loyalty, leading to longer-term contracts and higher TCV.
Optimizing your pricing model. Conducting thorough market research and analysis can help you determine the optimal pricing structure for your products or services. By aligning your prices with the perceived value and benefits offered, you can attract customers who are willing to pay more, thereby increasing your TCV.
Leveraging upselling and cross-selling opportunities is another powerful way to boost TCV. By identifying additional products or services that complement your existing offerings, you can encourage customers to upgrade or purchase more, increasing the overall value of their contracts.
At Zuora, we understand the importance of maximizing TCV for your business. Our innovative subscription management platform provides the tools and insights you need to implement effective strategies, optimize pricing models, and leverage upselling and cross-selling opportunities. With Zuora, you can unlock the full potential of your business and achieve greater TCV.
FAQs Total Contract Value
How often should I calculate TCV?
Ideally, calculate TCV at the time a contract is signed and review it at regular intervals (e.g., quarterly or annually) if there are any significant changes to the contract. Regular reviews help you stay updated on the value of active contracts.
Can TCV change during a contract period?
Yes, TCV can change if there are adjustments to the contract, such as service upgrades, add-ons, or extensions. If a client adds new services or adjusts the terms, recalculate TCV to reflect the updated value accurately.
Should I include discounts and promotions in TCV?
Yes, always account for any discounts or promotions to calculate an accurate TCV. This way, your TCV reflects the actual revenue expected from a contract rather than the full list price.
What if my business has both one-time and recurring revenue? How does TCV handle this?
TCV includes both recurring revenue and one-time fees associated with a contract. You should add one-time setup fees, implementation charges, and other additional costs to the recurring revenue to calculate the complete TCV.
Is TCV helpful for short-term contracts?
Yes, TCV can be useful for short-term contracts, though the overall value may be lower. TCV provides a clear view of the total revenue for each contract, which is helpful for forecasting and budgeting even in shorter contract cycles.
How does TCV impact sales and marketing strategies?
TCV helps sales and marketing teams target high-value customers, set appropriate sales quotas, and evaluate customer acquisition costs. By focusing on strategies that maximize TCV, teams can prioritize efforts that bring in higher revenue and longer-lasting customer relationships.