What is Total Contract Value (TCV) & How to Calculate

• Amol Ghemud
• What is Total Contract Value (TCV) & How to Calculate
• Published: December 30, 2022

Contributors: Amol Ghemud
Published: December 30, 2022

Summary

Everything you need to know about TCV! Let’s delve into the significance of Total Contract Value (TCV) as a pivotal metric for evaluating business performance. It outlines how TCV encompasses the entire financial commitment of a client over the contract’s duration, incorporating all fees, charges, and recurring payments. Key insights include the method for calculating TCV, its importance for revenue forecasting, strategic planning, and financial performance assessment, as well as its distinction from Annual Contract Value (ACV).

The term “Total Contract Value” (TCV) denotes the complete value of a contract or agreement between a firm and its client. It is an estimate of the total cost of the financial commitment the client has made over the course of the contract, taking into account all fees, levies, and recurrent payments.

Total Contract Value (TCV) Calculation: 

To determine the Total Contract Value (TCV) of a contract or agreement, take the following actions:

Determine the Terms: Establish the contract’s particular conditions and specifics. This covers the length of the contract, the price range, and any regular payments.

Sum Each Payment: Total of each individual payment that the consumer will make over the length of the contract. This covers both one-time charges and ongoing payments.

Discounts and credits are excluded: Subtract them from the total amount of payments determined in the previous step if any concessions, credits, or incentives are being provided as a result of the contract.

Include Any Upsells or Add-ons: Consider adding the potential value of any extra services, upsells, or add-ons that the customer may choose to purchase during the contract term.

Final Calculation: You will have the Total Contract Value (TCV) of the deal after accounting for all payments, discounts, and potential upsells.

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FAQs

1. Why is Total Contract Value an important metric for businesses?

Because it offers a thorough picture of the monetary value of client contracts or agreements throughout their duration, total contract value (TCV) is a crucial indicator for businesses. 

Here are some reasons why TCV is an important measure and how it affects businesses:

• Revenue Forecasting
• Strategic Planning
• Financial Performance Assessment
• Customer Relationship Value
• Revenue Recognition
• Business Valuation
• Sales and Marketing Strategies
• Contract Optimization
• Budget Allocation
• Business Growth

TCV can be used to assess the worth of several contracts, which can assist firms in setting priorities and concentrating on the most lucrative prospects. TCV is a crucial indicator for organizations since it offers insightful information about the overall value of a contract and aids in decision-making.

2. How is Total Contract Value different from Annual Contract Value (ACV)?

Although both Total Contract Value (TCV) and Annual Contract Value (ACV) are metrics used in business to assess revenue from client contracts, they concentrate on various facets of revenue estimation and portrayal. They differ as follows:

Total Contract Value (TCV):

1. TCV is the term used to describe the total cost of a customer contract throughout the contract, which includes all payments, fees, and charges that the client is obligated to make.
2. TCV covers all fees for the duration of the contract, including startup and ongoing fees for subscription services.
3. TCV is particularly helpful for corporate appraisal, strategic decision-making, and long-term financial planning.

Annual Contract worth (ACV): 

1. An annualized measure of a customer contract’s entire worth, ACV focuses solely on the revenue anticipated to be produced over the course of a single year.
2. ACV takes into account fees and recurring charges that are anticipated to be paid within a year.
3. ACV is especially helpful for analyzing short-term revenue trends, projecting sales, and comprehending how client contracts will affect revenue in the short run.

The main distinction between the two is the time frame that TCV and ACV take into account. TCV considers the whole customer contract period, considering all payments made during that time. Conversely, ACV concentrates on the annual revenue from the contract earned within a single year. TCV is helpful for long-term planning, whereas ACV is useful for evaluating annual income. Both metrics have their uses.

3. What components are included in the calculation of Total Contract Value?

Total Contract Value (TCV) is the total cost of a contract over the course of its whole term, including all fees, costs, and potential upsells. It has various elements that affect how it is calculated. The following factors are crucial in determining the total contract value:

• Minimum Contract Value
• Membership Fees
• Application Fees
• specialised services
• Renewal Charges
• Opportunities for Upsell and Cross-Sell
• Fees Based on Usage
• Extensions and Extras
• Contractual Amendments
• Discounts and Rewards

Total Contract Value (TCV) is a complete depiction of the total monetary value of a contract over the course of that contract, including a variety of elements like base contract value, subscription fees, implementation costs, professional services, renewals, upsell opportunities, usage-based fees, add-ons, contractual changes, discounts, and potential termination fees.

4. How can I calculate Total Contract Value for a given contract?

The below steps should be followed to determine the Total Contract Value (TCV) for a specific contract:

• Get contract details
• Select contract elements
• Total the elements
• Consider alterations
• Calculate potential upsells and take termination fees into account.
• Add up all the values
• Exhibit the TCV

The calculation is shown here in formula form:

TCV = Base Contract Value + Subscription Fees + Implementation Costs + Professional Services + Renewal Fees + Upsell Opportunities + Usage-Based Fees + Add-ons + Contractual Changes +/- Discounts – Termination Fees

TCV offers a comprehensive assessment of the contract’s value, considering various components and potential adjustments. It aids parties involved in the contract in understanding its overall financial impact.

5. What is the significance of contract duration when calculating Total Contract Value?

Due to its direct effect on the contract’s financial outlook and influence on the total value reflected by the TCV, the contract duration is a critical factor when determining the Total Contract Value (TCV). The total contract value (TCV) includes all associated costs, fees, and potential upsells. It represents the overall dollar value of the contract over its entire term. What the contract duration means for calculating TCV is as follows:

• An accurate representation
• Long-term dedication
• Renewal Impact 
• Risk for Recurring Revenue 
• Upsell and Cross-Sell
• An evaluation of budgeting and planning

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About the Author

Amol Ghemud

Optimizer in Chief

Amol has helped catalyse business growth with his strategic & data-driven methodologies. With a decade of experience in the field of marketing, he has donned multiple hats, from channel optimization, data analytics and creative brand positioning to growth engineering and sales.