How to Calculate the Total Contract Value
By James Bell
- Finance , Higher Level Management , Metrics and Ratios , SaaS ,
- 26 Nov
Total Contract Value is the total committed revenue of recurring and one time charges. This metric is also referred to as CV or TCV. It is a forecast that is helpful in budgeting and allocating resources effectively. This metric can help marketing and sales managers know which customers are more profitable than others. It also helps with revenue and cash flow projections.
We will look at calculating this metric by weekly and monthly billing cycles. If the contract is for a one time purchase, then the Price of the contract is the Total Value. Changes in periods lengths and amounts in different contracts can have a dramatic effect with this metric. It’s important to normalize CV’s when you can for a better comparison.
Their can be different ways of normalizing this metric and it’s important for management and other analysts to find and use a consistent way to measure and compare contracts.
Total Contract Value for Weekly Billing Cycles
![\[ TCV =One\ T ime\ Fees + \frac{Price}{Days\ in\ Billing\ Period}*(End\ Date - Start\ Date) \]](http://stumptownfin.com/wp-content/ql-cache/quicklatex.com-10ef28bda78bf44723ed4c94d1c16319_l3.png "Rendered by QuickLaTeX.com")
where
Total Contract Value
End date of Contract
Start Date of Contract
Price
This is what you bill your customers. If you only bill once to use a product forever, then your Total Contract Value = Price. This is why many companies like the SaaS model. Manufacturing and re-sellers can find extra revenue in service contracts if you can find a way to add more value to existing customers.
Number of Days in Billing Period
This is the total number of days between what you charged in your price. Weeks and months don’t line up so we use break price down by day.
End date of Contract
It’s important to keep this consistent from period to period as you need to use this formula to describe a point over time.
Start date of Contract
Same things goes with the start date. Depending on how you bill will drive a lot of how these dates work.
Total Contract Value for Monthly Billing Cycles
![\[ TCV = MRR * n + One Time Fees \]](http://stumptownfin.com/wp-content/ql-cache/quicklatex.com-0295821a8a425fd64f460d95233429e7_l3.png "Rendered by QuickLaTeX.com")
where
Number of Months
Total Contract Value
If you charge a flat one time fee or charge then the total contract value is the dollar amount of the contract. If the contract is broken out into different billing cycles, there are a couple of ways to determine the TCV.
Monthly Recurring Revenue
This is the amount of revenue coming in each month. For the TCV, you’ll use the the MRR for each month of a longer term contract.
Number of Months
This is the number of periods in the contract. If you are on an annual billing cycle, you can swap out monthly recurring revenue for annual recurring revenue.
One Time Fees
If you have one time fees or charges, you can add these on to the end of the formula. Keep the one time nature in mind when forecasting as you don’t want to include one time revenues in a recurring manner.
Other Considerations
If you don’t have a contract, then there is an increased amount of risk. People change their mind and you may not know what a competitor is whispering into your clients’ ear. Revenues become less predictable as more risk comes into play. This is due to the increase in volatility and accuracy concerns in forecasting actual revenues for future periods.