Contract Value: Everything You Need to Know
Contract value, or total contract value, is what a contract is worth over its lifetime.3 min read
Contract value, or total contract value, is what a contract is worth over its lifetime. If calculated correctly, total contract value helps you put a viable estimate together that enables you to determine your:
- Annual contract value per customer.
- Annual contract value. Bigger companies tend to get bigger ACVs.
- Customer acquisition cost.
Knowing your total contract value allows you to implement a profitable strategy which is essential for your company's viability.
What Is Contract Value
A contract's value is what a government contract is worth. Government contracts have values that can go up in the millions. Several factors determine a contract's value including:
- The service or product involved in the contract.
- The size of the bidding agency.
- The government level.
- The participating industry.
Annual Contract Value (ACV)
The Annual Contract Value is the average annualized revenue per contract less any one-time fees. While ACV is not a meaningful metric by itself, it is a useful baseline metric to compare to other metrics, like Customer Acquisition Cost (CAC). You can analyze the ACV to adjust the money you spend in customer acquisition cost (CAV) given your user base size.
Knowing Your ACV Strategy
You don't have to have a large ACV to have a successful company. You need to implement the right ACV strategy. Many Software as a Service (SaaS) companies have built a large company based on small ACV values. If you have a small ACV, then you need to have a low CAC.
Business to Client (B2C) and Business to Business (B2B) contract ACV differs. B2C customers usually have a lower ACVs. Still, you can have a successful company with a low ACV. For example, Spotify has a small ACV, a large user base, and a small CAC. They are just as successful as a company like Citrix who has a large ACV, small user base, and a larger customer acquisition value than Spotify.
Use the Average Contract Value to make the right strategy for your business. Knowing and tracking ACV helps you make better decisions for your business.
Total Contract Value
Total Contract Value (TCV) include one-time and recurring less any usage charges. The TCV measures the value your client has committed to the contracts. It does not, however, match the aggregate invoice amount billed over the subscription term. Calculate total contract value by adding all the total recurring revenues for the contract term, plus fees and the sum of the subscription fees multiplied by the total number of subscription payments.
Why Is TCV Important?
Total Contract Value (TCV) helps you predict revenue. Conduct research on the total contract value of your industry or market so that you can have a solid estimate when you have a precise estimate, then you can budget accordingly. It allows sales and marketing to pursue the proper clients. For an even better estimating view, consider fees, such as cancellation fees, upgraded feels, and renewal fees.
What Is Total Contract Value (TCV) in SaaS
The Total Contract Values (TCV) parameter represents the contract value assuming the contract is fully executed. The contract value is typically the contract in its entirety. Contract value applies to the entire contract worth and spans over years while bookings apply to specific clauses in the contract and only the first year of the agreement. Seemingly simple changes in a contract package can have a significant impact on TCV. TCV metrics can include renewal bookings and multiple terms. Overall the total contract value should have defined rules and calculations that customers can understand.
Understanding contract value is essential to building a viable business. Applying the wrong strategy to customer acquisition can bankrupt your company before you even start. Seek counsel to understand what acquisition model you should have in place.
If you need help with your annual contract value strategy, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.