Total Contract Value (TCV): The Complete Guide (57 Examples)

SaaS companies have a lot of expectations placed on them when they’re asked to talk financials. Having a good product that makes money isn’t enough – they need growth, expansion and hard numbers to back both of them up.

One of the metrics that you might have seen when combing through blog posts from other SaaS companies is TCV – Total Contract Value.

What exactly does this term mean, and is it a useful one for your business to keep track of? Find out now!

The Definition of TCV

Each customer is generating money for you. This money can be expressed in a number.

Sometimes that figure is negative, if they’re on a free plan and costing you money in support time and bandwidth. But as many companies have shown, you can absolutely strike a good balance of free and paid plans and still make a solid profit.

Each time they start using your service, they’re holding up their end of the contract. That contract is an agreement where you provide software to fill their needs, and they provide money to keep your development team paid and continue coming up with updates.

The total contract value of a customer is the value, in dollars, that they bring to your company over the length of time that their contract entails.

Pretty simple, right? Let’s look at some examples.

An Illustration of Total Contract Value (TCV)

Imagine you have a customer who clicks “buy” on your website.

They select the three-month option at fifty dollars per month.

That means their “contract” with you is three months long, and so we multiply that monthly fee by three to get the total value of the contract.

In the end, that contract is worth $150.

Definitely remember here that you can’t describe month-to-month contracts as “infinite” contract values. It seems kind of silly when you write it out like that, but a surprising number of people think of recurring contracts as if they’ll last forever. The total contract value only lasts until the renewal date comes around.

Add Some Fees 

Suppose there’s an onboarding fee? Don’t forget to add in any one-time charges that a customer might encur. If the fee was $10, then the same three-month contract has a total value of $160.

It works the same with promos, of course. Everybody’s got promo codes floating around the Internet that give you a couple of bucks off a purchase. As you might expect, those work like negative one-time fees and remove value from a contract.

All told, a TCV is calculated using the net total revenue brought in during each contract period, plus additional fees and minus one-time discounts.

When to Use Total Contract Value (TCV)

Although there is a school of thought saying that TCV is a poor metric (we’ll get into that in a little bit) there are a few important things it can tell you.

First, you can gather more data about customer demographics. It’s literally always a good idea to create more data points about the different groups of people that use your product!

By looking at your customers through the lens of TCV, you’re able to find which demographics tend to purchase longer contracts, and which tend to purchase shorter contracts.

You’ll also be able to see if you’re missing out on opportunities to market contracts of different length or apply discounts to make people believe they’re getting a better deal. This information will give your sales team an edge over the competition.

Second, you can balance your TCV against your Customer Acquisition Cost (CAC) to figure out which of your contracts are actually worth the effort you’re putting into them.

If your Customer A has a two-year contract at $99 per year, and Customer B has a three-year contract at $150 per year, it sure looks like Customer B is better for your business. But perhaps customers like Customer B take more than three times the initial outlay to attract as Customer A! The TCV balanced against the CAC brings that into the light of day.

The Big Problem with Total Contract Value (TCV)

However, there is one extremely important thing to remember about the concept of TCV that makes a big difference for just about every aspect of your financial reporting.

Who’s got the money?

If you’ve signed up a user for the two-year plan at $1000 per year, you may think you have a $2000 customer. And that’s what TCV would in fact tell you.

But you only have what they’ve actually taken out of their pockets. The customer could very easily cancel in the middle of the year and leave you high and dry come the next payment cycle. If you had been using TCV to come up with your revenue predictions, you might be quite a bit off from reality!

Now, contracts can certainly include penalty clauses for breaching them, but how rarely are they really going to be enforced? If the customer has a legitimate reason for canceling (such as a lack of support on your part, missing features, problems with their own business) then you risk a major PR headache from enforcing a penalty clause.

For that reason, the only way to truly integrate multi-year TCV calculations is by dealing with only prepaid deals. That value promised by the contract can’t be counted until it’s in your hands.

Since revenue is what constitutes TCV, here are 57 examples of annual contract value (ACV) SaaS metrics from private B2B SaaS businesses, along with monthly (MRR) and annual (ARR) recurring revenue stats. We’ve compiled data from companies with both high and low ACV.

57 Examples of Annual Contract Value (ACV) from Private B2B SaaS Businesses (+ Recurring Revenue – ARR, MRR)

Conclusion

No single metric can serve as a perfect indicator for company health. The world of SaaS has companies with surprisingly low average customer value over the length of their contracts, and yet these can be some of the fastest-growing companies on the ticker.

That’s why healthy financial reports don’t rely on just one set of data points, but instead present all of them together. The same holds true for the opposite, as well: if someone is trying to swing your opinion based on inflated TCVs, you should know to keep them grounded in reality.

When you’re asked to give a revenue estimate, just think carefully about how to use Total Contract Value in that estimation. Understanding it inside and out is the key to using it effectively.

Author:

Yassir Sahnoun is the founder of YassirSahnoun.com. He helps SaaS companies like Castbox and FluentU attract sales using content strategy, copywriting, blogging, email marketing, & more. If you want to up your content marketing game, you can schedule a free discovery call with Yassir by clicking here.