.avif)
You need to know how much money each customer contract is really worth over time to make smart decisions about pricing and growth. One of the most important numbers to track when running a SaaS business is the TCV metric, so let’s look at the TCV meaning and how to use it.
What is TCV, and what does TCV stand for?
TCV is an acronym that stands for “total contract value.” It’s the total revenue committed in the contract term, including subscription fees and one-time items like onboarding or training.
Note: Want ACV fundamentals for context? Read our guide to ACV in SaaS.
TCV in the SaaS industry and why it’s important
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.
TCV meaning vs. Other SaaS metrics (ARR, LTV, MRR)
TCV meaning vs. ARR, MRR, and LTV:
- TCV: All contracted revenue over the term, including one-time fees.
- ARR/MRR: Recurring subscription run-rate on a 12-month or monthly basis.
- LTV: Estimated net value of a customer over their full relationship based on retention and margin.
Use TCV to size signed deals and plan discounts. Use ARR/MRR to track recurring revenue health. Use LTV for long-term unit economics.
Note: Need a refresher on ARR? Read our post on ARR meaning.
Basics of how to calculate TCV
To calculate TCV, we need to bring these components together:
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
When usage varies, create an estimated TCV using agreed minimums, historical usage, or modeled consumption. Document assumptions so Sales, Finance, and RevOps share the same estimate.
Note: If you’re reviewing pricing structures more broadly, see our post on SaaS revenue models.
TCV vs. ACV
Use TCV to price and negotiate multi-year deals and to understand total booked value. Use ACV to normalize deal size to a per-year view for planning and quotas.
Tip: If the contract has significant one-time fees or ramped tiers, check both TCV and ACV to avoid skewed comparisons.
Note: For a deeper dive, read ACV vs. TCV.
Why TCV is important for SaaS companies
For SaaS businesses, this long-term view is vital. It helps with:
- Sales: Size deals, justify multi-year discounts, and align comp plans to TCV or ACV, depending on strategy.
- Finance/FP&A: Build forecasts from signed TCV, layer timing of invoicing, and stress-test exposure to large accounts.
- RevOps: Standardize TCV rules in CRM, enforce discount guardrails, and keep TCV vs. ACV consistent in dashboards.
- Product/CS: Identify high-TCV accounts for white-glove onboarding and structured expansion plays.
Note: Want the business model context? Read our blog post explaining the subscription-based business model.
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 represents the fixed total value committed in a contract at the time of signing. It doesn’t change automatically, but you can offer more upgrades as the client’s 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.
However, sometimes you might want to include expansions in the customer lifetime value (LTV) metric of cumulative ongoing value instead.
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. 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.
- Dedicated support: Offer white-glove support and outreach to nurture these key relationships.
- Tailored upselling: Use TCV insights to craft targeted upsell strategies. Offer these customers expansions that align with their needs and increase 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.
- Make data-driven investments: Use TCV insights to confidently invest in resources that will support your growth trajectory.
- 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.
- Refine marketing and sales strategies. Tailor your go-to-market approach to attract more of these high-value customers.
- Optimize pricing and packaging. Adjust your pricing and packaging strategies to get more 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.
- Negotiate with confidence: Having a clear understanding of TCV empowers you to negotiate deals that are financially sound and beneficial for your business.
Common pitfalls to avoid
Some typical issues include:
- Counting non-contracted upsides: Keep TCV to signed items only.
- Mixing bookings with cash timing: TCV is a value of the contract, not cash received.
- Dropping one-time fees: Include onboarding and implementation if they’re in the agreement.
- Ignoring ramps/tiers: Reflect schedule-based price changes inside the term.
- Inconsistent CRM rules: Define one source of truth for TCV fields and rollups.
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:
- Define billable metrics without engineering: Orb ingests raw usage events so that you can define your own billable metrics. Use Orb SQL Editor or a visual editor to do so.
- Accurate, always-current invoices: With Orb RevGraph, usage data is decoupled from pricing logic. That means invoices remain accurate by recalculating automatically as plans evolve.
- Price confidently with scenarios: Orb Simulations uses your historical data to simulate how pricing models affect revenue and usage before launch. Orb enables forecasting so that finance and product teams make more informed decisions.
- Integrate your stack: Direct integrations keep usage and revenue data synced across systems.
Ready to see the full potential of tracking your TCV? Consult our flexible pricing options to find a plan that perfectly aligns with your needs.
