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Want to understand the total value of your customer contracts? Discover how to calculate the Total Contract Value (TCV) of your customers.

Total Contract Value (TCV)

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Total Contract Value (TCV) is a metric that measures the expected total revenue generated from a customer contract, inclusive of all recurring revenue and one-time costs.

TCV takes into account the total value of a customer’s contract term, but it includes any additional costs (such as set-up fees, migration costs, and upsells of new tech). It’s often estimated at the beginning of a new customer contract in order to better understand the true value of a customer.

What is Total Contract Value (TCV)?

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Total Contract Value (TCV) is the total revenue generated from a particular customer, including recurring contract revenue and extra one-time fees (for example onboarding and hardware fees).

TCV = Yearly contract value x Contract length (Years) + One-time fees

How to calculate TCV

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The formula to calculate TCV is relatively simple, but you’ll need to know a few bits of information first, including your Monthly Recurring Revenue (MRR), the contract length for the particular customer, and any one-time fees associated with the customer account.

Let’s run you through an example: a customer is paying $3,000 per year for a 2-year contract, plus an onboarding fee of $500. This customer’s TVC would be $6,500.

The limitations of TCV

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While TCV is an important billing metric, there are limitations. The main downside is that TCV is based on the assumption that you will receive the total revenue amount from a contract. In reality, this isn’t always the case as cancellations can happen, and one-time fees can be difficult to estimate in advance.

For example, you might have a four-year contract valued at $2,000 per year which assumes you will generate $8,000 from a customer once the contract has ended. But, if a customer decides to cancel their contract after the second year, you’re left with only $4,000.

While there are a range of things you can do to protect yourself from losing some revenue (like adding cancellation clauses to your contracts), it’s unlikely that you will still see 100% of the total revenue from 100% of your customers.

Comparing TCV with other billing metrics

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Aside from TCV, there are a bunch of other metrics used to measure the value and revenue generated by customers.

TCV and LTV are both metrics used to measure a company’s revenue from a given customer. But, there are a couple of differences between the two.

TCV measures the actual revenue (both recurring and one-time fees) over the contract period from a given customer, while LTV measures the expected or predicted revenue over the course of the entire customer relationship.

TCV and Annual Contract Value (ACV) are both similar metrics used to measure the revenue generated by customers. But, the main difference between these two metrics is that TCV measures revenue over the entire contract period (whether that’s one, two, three, or more years), whereas ACV measures the average revenue from a customer or contract for a single year.

Plus, while TCV takes into account one-time fees in its calculation, ACV excludes one-time fees.

How TCV serves sales and marketing

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TCV is helpful in identifying the characteristics of high-value customers so you can direct your sales and marketing efforts toward them. By analyzing the behaviors, characteristics, and purchasing patterns of your most profitable customers, TCV can help your customer acquisition sales strategies bring in other high-value customers.

Ultimately, TCV is an essential financial metric used to understand and analyze the total revenue generated by a customer. While other metrics can predict the revenue a customer might bring in, TCV uses accurate contract figures to calculate the expected revenue from a customer.

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