Total Contract Value (TCV)

Definition

Total contract value or TCV is a crucial SaaS metric used to determine the amount of revenue that a contract will earn. It also considers recurring expenses like hiring costs, service charges, etc. SaaS companies can use this metric to estimate how much profit can be earned from a single contract.

Example

TCV = (Monthly Recurring Revenue x Contract Term Length) + Contract Fees. How does the TCV formula work in practice? Suppose Company A offers subscription model services with different pricing and plan options. Plan 1 is priced at $125/month for a year's contract and Plan 2 is priced at $1,200/month for a 2-year period along with a $300 onboarding charge. Thus, the TCV for each of these will be:Plan 1 = ($125 x 12) = $1,500Plan 2 = ($1,200 x 24) + $300 = $29,100

Why it matters

Since TCV considers actual bookings rather than forecasted, it’s an accurate measure of a company's revenue and growth. A company can use this metric to chalk out a budget while eliminating unwanted spend. TCV can also help in optimizing the marketing or sales budget. TCV divided by customer acquisition cost (CAC) tells how efficiently a company can bring in new customers. This throws light on the quality of its marketing channels.

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