Software Growth

TCV (Total contract value)

TCV is the full value of a customer contract over its entire term, often including one-time fees. It is a sales and bookings measure, not recurring revenue.

TCV is the headline number on a signed deal: everything the customer has agreed to pay over the whole term. It is useful for judging how big a sale was and for reporting bookings, and it is easy to misuse as if it were revenue.

How to calculate TCV

Add recurring fees across the term and any one-time charges.

A customer commits to $500 a month for 24 months, with a $1,000 onboarding fee. Recurring value is 500 x 24 = $12,000. TCV is 12,000 + 1,000 = $13,000.

Stripe describes TCV as the complete value of a contract across its entire term, without annualizing. Companies differ on whether one-time fees belong in it, so write down your rule.

TCV vs ACV vs ARR

  • ACV annualizes the recurring part: $12,000 / 2 = $6,000 a year.
  • ARR adds recurring revenue across all customers. This contract adds $6,000 to ARR, not $13,000.
  • TCV covers the whole term and is not an annual figure.

TCV and bookings

Many companies record TCV as bookings at signature. Corporate Finance Institute's example is a $120,000 three-year contract, which is $120,000 of bookings when signed, even though the customer is billed only $40,000 in year one if invoiced annually, and revenue is recognized evenly across 36 months. TCV tells you what you won. Billings tell you what you invoiced. Revenue tells you what you earned.

Why not to lean on it

Bessemer's Atlas argues that TCV and ACV can be manipulated and mislead, since stretching a contract's length makes TCV grow without any more recurring revenue. Two contracts with identical annual spend look very different in TCV if one is three years and one is one year. A customer might also cancel early, so TCV is a commitment of varying strength.

Where it matters for a small SaaS

If you sell monthly plans, TCV does not exist in any useful form. It appears when you offer multi-year deals, a one-time implementation, or a discount for prepaying. In those cases, track TCV for sales reporting, but run the business from MRR, ARR and cash. For a multi-year deal, a good check is to ask what it does to MRR and to cash this quarter. If the answer is a small amount of MRR and a large cash payment, you have a deferred revenue balance to account for.

Sources

Back to the SaaS glossary