What is Total Contract Value (TCV) & How to Calculate
“Total contract value” or “Total Contract Value” (TCV) is the full value of the contract or agreement between a company as well as its clients. It’s an estimation of the total value of the financial commitments the client has made during the term of the contract, incorporating the total amount of fees, levies, and recurring payments.
Total Contract Value (TCV) Calculation:
To determine the total value (TCV) of an agreement or contract, you must take the following steps:
Set the terms: Establish the contract’s particular terms and conditions and the specifics. The length of the contract price range, as well as the regular installments.
Sum Every Payment: The sum of each payment the consumer is required to make during the term in the agreement. This includes one-time charges as well as ongoing expenses.
Credits and discounts are not included: Subtract them from the total amount of the payments determined in the preceding step if the contract provides any credits, concessions, or incentives.
Include any upsells or Add-ons. It would be best to consider including the value potential of additional services and add-ons that the customer might choose to purchase within the contract term.
Final calculation: It will give you the total contract value (TCV) in the contract after accounting for all the payments, discounts, payments, and possible upsells.
What makes the Total Contract Valuation an essential business metric?
It provides a comprehensive overview of the financial value of contracts with clients or agreements over their terms. The total value of a contract (TCV) is a vital indicator for companies.
Here are some of the reasons TCV is a crucial measure and how it impacts 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
The TCV tool can be used to evaluate the value of various contracts. This helps companies set goals and focus on the most profitable opportunities. TCV is an essential indicator for businesses as it provides a clear picture of the worth of a contract and helps in decision-making.
What makes the value of a Total Contract different from the Annual Contract Value? (ACV )?
While Total Contract Value (TCV) and annual contract value (ACV) are measures used in the business world to evaluate the revenue generated by contracts with clients and arrangements, they focus on different revenue estimation and depiction aspects. They differ in the following ways:
Total Contract Value (TCV)
“TCV” is the word used to define the total cost of a contract throughout the term, including all fees, payments, and other charges the customer must pay.
TCV covers all costs throughout the contract term, including annual and startup fees for subscription services.
TCV is particularly useful for the strategic appraisal of companies, decision-making, and long-terminal plans.
