Total Contract Value (TCV)

How to Calculate Total Contract Value

Calculate total contract value by multiplying MRR by the total length of the contract and adding any one-time fees, including onboarding fees, implementation costs, cancellation charges, and any other one-time expenses.

The simplest example is a one-year contract for a SaaS solution with an initial service fee for implementation. Let’s say the annual recurring revenue (ARR) for the deal is $24,000, and there’s a $5,000 implementation charge. The calculation would be:

$24,000 (or, $2,000 MRR x 12 months) + $5,000 = $29,000 TCV

The Differences Between Total Contract Value, Lifetime Value, and Annual Contract Value

There are many different ways to look at and think about the revenue generated by your contract terms, three of which are TCV, annual contract value (ACV), and customer lifetime value (LTV).

As mentioned above, TCV is the most holistic way to think about your contract terms, combining all fees and recurring revenue over the length of the agreement. ACV is a similar metric but takes a more narrow view of the customer contract.

Unlike TCV, ACV calculations don’t take one-time fees into consideration. Rather, it’s a way to annualize the recurring revenue from a customer contract. So, consider a two-year contract for $48,000 and a $5,000 upfront implementation fee. The TCV would be $53,000. But your ACV would be $24,000 ($48,000 divided by the two-year contract term, not including the service charge). In a SaaS business, ACV is a far more commonly-tracked metric than TCV because of the major focus on subscription revenue.

Comparing TCV to LTV is a bit more nuanced. Some non-SaaS businesses might talk about the two interchangeably because, technically, TCV is the value of a deal over its lifetime. But in a recurring revenue, subscription-based business, renewals are everything. That’s why your LTV calculations incorporate churn rate as you try to determine how far beyond the initial contract a customer will stay with you.

Whereas TCV only considers the life of a single contract, LTV accounts for the revenue you expect to generate over the entire span of a relationship with a customer. That may include multiple contract renewals. So, in the example above, imagine you renewed the two-year, $48,000 contract for two more years with a 10% increase to $52,800. If the customer churned after those two years, you’d find the LTV by combining the total value of both agreements — $105,800 in total.

Each of these metrics brings unique value to your business.

• Total contract value shows you the actual, committed revenue you’ll generate from a deal.
• Annual contract value shows you the average ARR you expect from new customers, which can help you build assumptions for revenue forecasting.
• Lifetime value shows you what you can expect to earn from a customer across (potentially) multiple contracts, which helps you calibrate your customer acquisition cost (CAC).

Why SaaS Companies Should (or Shouldn’t) Track Total Contract Value

The truth is that total contract value is not a standard metric for the purest of SaaS businesses. However, not every SaaS business is well-suited to focus specifically on ACV, where recurring revenue is the entire focus.

If you have a complex business model — or at least have a significant services arm or even hardware component — TCV becomes a more important way to understand cash inflows and improve the precision of cash flow forecasting.

Palantir is a good example of the use of TCV in a SaaS business. Since Palantir’s IPO in 2020, market analysts have debated the company’s business model. As a tech company with recurring revenue, Palantir was often valued as a SaaS business (which it is). But the company pulls a significant amount of revenue from its services business. As such, you’ll see TCV reported as a metric in Palantir’s SEC filings. Without it, they’d be under-reporting new bookings generated by nearly $1 billion per quarter.

Think about your own business model. If one-time fees or recurring service costs are a major part of your contracts, consider making TCV a standard part of your financial reporting. If you’re mainly a subscription/recurring revenue business with some services here and there, focus on ACV instead.

How to Improve TCV for Your Business

Much like ACV in pure SaaS businesses, TCV is an important growth lever for SaaS businesses that have significant non-recurring revenue components. As you look to build momentum in your business, increasing TCV is a direct way to boost the company’s growth without having to significantly exceed expectations for new customers.

The formula for TCV indicates two variables that you can leverage to increase performance:

• Contract length. If your specific goal is to increase TCV, the easiest way might be to increase the length of your contracts. Instead of selling annual deals, consider making multi-year contracts the standard. If it aligns with the value you provide customers, you’ll see TCV trend upward.
• Pricing. The other variable is pricing, whether that’s on the recurring revenue side or the one-time fee side. Maybe you increase the cost of your implementation services. Or, maybe you raise the rate of your subscription fees. Either way, higher prices means higher TCVs.

You can’t change either of these variables overnight. Neither of these variables is things that you can necessarily change overnight. Major changes in either lever could significantly impact win rates. If you want to take steps to pull these levers and improve TCV, consider a couple of strategies.

Measure and Analyze All of Your Sales and Revenue Metrics in Mosaic

No single metric is a perfect way to understand the health and performance of your business, which is why you should always be looking at TCV in the context of your many other sales and revenue metrics.

Mosaic makes that easy by integrating all of your critical systems of record — CRM, ERP, HRIS, and billing systems — to provide real-time visibility into the metrics that matter most. Not only that, but the platform also gives you the ability to drill down into each metric, analyzing them by various attributes to better understand the “why” driving them.

Stop wasting time manually pulling data together and calculating metrics in spreadsheets just for the numbers to go stale when you’re done. Reach out for a personalized demo to learn how Mosaic can help.