Total Contract Value is the total value of a contract including fees and recurring revenue for the period defined by the contract. Here’s how you calculate TCV:
Total recurring revenues in the contract term + contract fees
For example, let’s say you’ve closed a deal with a $50 onboarding fee plus 14 months of a recurring subscription at $10 per month.
The Total Contract Value for this contract is $190. Calculated like so:
($10 subscription cost * 14 months) + $50 fee = $190
Why is TCV important?
Total Contract Value is a useful metric for predicting revenue. Accurate revenue projections allow for accurate estimates of other parts of your budget, ensuring you don’t overspend or limit resources while scaling. Precise revenue predictions also keep investors happy!
TCV is also an excellent metric for sales and marketing teams. Salespeople and marketers can get a sense of which types of customers are most profitable. Salespeople can see which customers tend to have higher contract value and can concentrate their Lead Generation efforts wisely in the future. Marketers can compare TCV with Customer Acquisition Cost (CAC) to determine which types of customers have the highest profits.
For example, a startup might discover that Millennial buyers tend to sign up for an 18-month package and Baby Boomers tend to opt for a 6-month package. Additionally, they find that it’s much less expensive to acquire a Millennial buyer as the majority of signups are coming from Facebook ads with a low Cost Per Click (CPC). It would make sense for the sales and marketing teams to spend more time and money on acquiring Millennials. This would decrease expenses and increase revenues simultaneously.
Other TCV considerations
Total Contract Value doesn’t necessarily take into account any contract changes, but there are a few other fees that you may need to consider. Keep an eye on these types of fees to keep revenue predictions precise:
- Any cancellation or year-end fees – Are there fees associated with your contract ending? If so, don’t forget to add these to your Total Contract Value!
- Upgrade fees or renewal fees – What happens if your client wants to upgrade their subscription during the contract period? These types of fees don’t get added to the Total Contract Value as there is no way to know if a customer will or will not upgrade or renew their contract.
Approach total contract value with a solidified plan
Your team can make the most of this metric by having a solid plan for how it will be calculated and used. It’s important to train your sales staff on how to calculate this metric as it will likely be part of each proposal or contract they send out. You can also teach your team to use this metric to steer their efforts in more efficient directions. When used correctly, Total Contract Value will help you predict revenues, stay lean, and grow!