Total Contract Value (TCV) meaning and how SaaS companies use it

Did you know that Cobloom mentioned TCV as one of 2024's top 50 SaaS metrics to track for growth? It should come as no surprise, as TCV is vital for understanding and optimizing the total value of your customer contracts. 

In this article, we'll explain TCV, a critical metric for SaaS success. We'll explore what TCV means, how to calculate it, and why it's crucial for SaaS companies.

You'll also learn:

• How TCV provides valuable insights into long-term revenue.
• The key differences between TCV and other SaaS metrics like ARR and CLV.
• When you need to know your TCV and how it can drive strategic decision-making.

So, what is TCV exactly? Let's get started.

What does TCV stand for?

TCV is short for Total Contract Value, and it represents the total revenue a customer will bring in over the entire duration of their contract with your company. TCV includes the recurring revenue from their subscription and one-time fees, such as onboarding. 

Why is TCV important in SaaS?

It represents a commitment. Unlike one-off purchases, SaaS customers engage in ongoing relationships with providers. TCV captures the full financial picture of that relationship. 

It's a more accurate reflection of the revenue you can expect from a customer than simply looking at their monthly subscription fee.

For SaaS businesses, TCV is particularly relevant because it provides valuable insights into long-term revenue streams. By considering the total contract value, SaaS companies can:

• Forecast revenue more accurately
• Make informed decisions about pricing and customer acquisition costs
• Spot customer segments that could be particularly profitable
• Optimize sales and marketing efforts for your SaaS product

We’ll expand on these below.

TCV’s meaning in relation to other SaaS metrics

TCV works in tandem with other important SaaS metrics. 

For example, Annual Recurring Revenue (ARR) provides a snapshot of your predictable, recurring revenue stream. Customer Lifetime Value (LTV) predicts the total net profit a customer will generate throughout their entire relationship with your company. 

TCV complements these metrics by providing a concrete measure of the revenue a customer has committed to within a specific contract timeframe.

Basics of how to calculate TCV

We’ve explained TCV’s meaning and how it gives us the total revenue expected from a customer contract. But how do we actually calculate it? The core of TCV lies in its components:

• Recurring subscription revenue: This is the bread and butter of SaaS. It's the predictable, ongoing revenue stream from your customers' subscriptions, often billed monthly or annually. Think of it as the foundation of your TCV.
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• One-time fees: These are the extra charges that often pop up at the start of a customer relationship. Common examples include onboarding fees, setup costs, or even training sessions. 
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• Extra charges: Remember to include extra revenue opportunities These can come from things like add-on features, premium support, or even upgrades to a higher subscription tier. They contribute to the overall TCV and reflect the evolving needs of your customers.

To calculate TCV, we need to bring these components together. The formula is quite straightforward:

TCV = (Monthly Recurring Revenue x Contract Term Length) + One-Time Fees + Extra Charges

Let's imagine this: a customer signs up for a project management tool with a monthly subscription of $500. The contract lasts for 2 years, and there's a one-time onboarding fee of $1,000.

In this case, the TCV would be:

TCV = ($500 x 24 months) + $1,000 = $13,000

Why TCV is important for SaaS companies

SaaS is about building relationships with customers, not just making one-off sales. That’s where TCV really shines. It provides that crucial long-term revenue visibility that SaaS companies need.

Think of it this way: TCV helps you see the full picture of a customer's commitment. It goes beyond the monthly subscription and captures the entire value of the contract over its lifespan. 

This includes any agreed-upon upsells or expansions that are explicitly added to the contract or forecasted based on customer agreements. 

For example, if a customer commits to additional licenses or features over time, those amounts are factored into TCV as they reflect part of the total anticipated revenue they’ll bring.

For SaaS businesses, this long-term view is vital. It helps with:

• Financial planning and forecasting: Knowing the total value of your contracts allows for more accurate financial projections, which are crucial for making informed decisions about investments and growth strategies.
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• Customer segmentation: TCV helps you identify your most valuable customer segments, allowing you to tailor your offerings and support to their specific needs.

Now, let's compare this approach to companies that rely on one-time sales. In those cases, the focus is on the immediate transaction. In essence, TCV's meaning for SaaS goes beyond just a number; it’s about nourishing relationships for better customer lifetime value. 

TCV aligns perfectly with this objective by providing a clear measure of the long-term revenue potential of each customer.

When do you need to know the TCV?

Understanding the TCV’s meaning is one thing, but knowing when to calculate and analyze it is just as important. Here are a few key scenarios where TCV takes center stage:

Contract negotiations

Imagine you're in the middle of a deal with a potential customer. This is a critical moment where TCV would come in handy. By calculating the total contract value, you can evaluate the potential revenue and get a clear picture of the overall revenue this customer could bring to the table.

You can also use it to analyze and set pricing strategies or even establish discount levels. This approach is especially useful for multi-year agreements. Having a firm grasp of the TCV helps you negotiate terms that are beneficial for both parties with confidence.

Revenue forecasting

TCV is a vital tool for accurate revenue forecasting. It helps you project future revenue streams and identify expected revenue based on signed contracts over specific periods. 

You can also use it to assess the impact of large deals and see how those big wins will influence your overall revenue targets. TCV allows you to make informed business decisions and use revenue projections to guide strategic initiatives.

Upselling and cross-selling opportunities

TCV isn't static; it can evolve as your customers' needs change. When a customer purchases extra products or upgrades their subscription, make sure to factor those changes into the total contract value and include expansions in TCV. 

You should also monitor the impact of upgrades. Make sure to also track how upgrades and add-ons influence the overall customer value and your revenue streams. 

You can also use TCV to spot upselling potential. Then, use TCV data to pinpoint opportunities to offer relevant upgrades to existing customers.

Strategic decisions you can make, driven by TCV

Here are four ways you can leverage TCV to drive growth and success:

Prioritizing high-value customers

Some customers bring in more revenue than others. TCV helps you identify those VIPs. By analyzing TCV across your customer base, you can pinpoint your most valuable accounts and allocate resources to ensure their success. 

This approach might involve:

• Better onboarding: Provide a premium onboarding experience to high-TCV customers. Make sure they get the most out of your product from day one.
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• Dedicated support: Offer white-glove support and outreach to nurture these key relationships.
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• Tailored upselling: Use TCV insights to craft targeted upsell strategies. Offer these customers expansions that align with their needs and maximize their lifetime value.

Planning long-term investments

TCV provides crucial data for long-term planning and investment decisions. It helps you:

• Align TCV projections with growth goals: Confirm your revenue projections are in sync with your overall business goals.
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• Make data-driven investments: Use TCV insights to confidently invest in resources that will support your growth trajectory.
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• Secure funding: Present TCV data to investors to show the financial health and growth potential of your business.

Benchmarking customer segments

TCV can be a powerful tool for understanding the performance of various customer segments. By comparing TCV across various customer profiles, you can:

• Find your most profitable segments. Pinpoint the types of customers who generate the highest contract values.
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• Refine marketing and sales strategies. Tailor your go-to-market approach to attract more of these high-value customers.
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• Optimize pricing and packaging. Adjust your pricing and packaging strategies to maximize revenue from your most profitable segments.

Evaluating deal profitability

TCV plays a crucial role in assessing the profitability of individual deals. It allows you to:

• Avoid overextending on discounts: Use TCV to make informed decisions about discounts and incentives. This advantage helps you make sure they don't erode your profitability.
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• Negotiate with confidence: Having a clear understanding of TCV empowers you to negotiate deals that are financially sound and beneficial for your business.

TCV’s unique value over other metrics

TCV's meaning goes beyond a simple calculation. It's about grasping the full financial scope of your customer relationships. TCV is different from Annual Recurring Revenue (ARR) or Monthly Recurring Revenue (MRR), which focus primarily on recurring subscriptions. 

TCV captures the entire picture. It includes those valuable one-time fees and potential upsells or expansions that contribute to a customer's overall value.

By considering the total contract value, SaaS companies gain valuable insights into:

• Long-term revenue potential: TCV provides a clearer picture of the revenue you can expect from a customer over the entire duration of their contract.
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• Customer loyalty and contract lengths: Analyzing TCV across different customer segments can reveal trends. Analyzing trends in contract lengths and customer commitment helps you tailor your offerings and retention strategies.
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• Overall customer lifetime value: TCV serves as a building block for estimating LTV. It gives you a more holistic understanding of your customers' long-term value.

Of course, TCV doesn't exist in isolation. It works best when used in conjunction with other key SaaS metrics. For example:

• ARR: ARR provides a snapshot of your recurring revenue. TCV adds another layer by factoring in one-time fees and potential upsells.
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• CLV: TCV contributes to a more accurate calculation of CLV. It helps you understand the long-term profitability of your customer relationships.
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• Churn rate: By analyzing TCV alongside churn rate, you can find trends in customer retention and pinpoint areas for improvement.

Use Orb to integrate TCV into the revenue planning process

We've explained TCV’s meaning and importance for SaaS businesses. Now, let's talk about how you can integrate this crucial metric into your revenue planning process with the help of Orb.

Orb is a done-for-you billing platform. It’s designed to give businesses of all sizes what they need to optimize their recurring revenue strategies. 

Here's how Orb can help you integrate TCV into your revenue planning process:

• Accurate revenue recognition: Orb tracks all revenue components. These include recurring subscriptions, one-time fees, and add-on purchases. Orb helps you get a precise view of your TCV, enabling accurate revenue forecasting and reporting.
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• Flexible contract modeling: Orb lets you easily model various contract terms and pricing structures. We give you the flexibility to analyze scenarios and optimize your pricing strategies for maximum TCV.
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• Granular usage tracking: Orb's usage tracking provides insights into customer behavior and product usage. This data can be used to identify trends and predict future revenue streams. 
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• Reporting and analytics: Orb provides financial reports and analytics dashboards. These give you a clear picture of your TCV performance. Insights help you spot high-value customer segments and track key metrics. 
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• Seamless integrations: Orb integrates with popular CRM, accounting, and data warehousing tools. We simplify your billing operations and confirm data consistency across your entire tech stack.

Ready to unlock the full potential of TCV? Consult our flexible pricing options to find a plan that perfectly aligns with your needs