Total Contract Value Definition
Total Contract Value (TCV) is the total amount of revenue that a company expects to generate from a customer over the entire duration of their contract. This includes all recurring revenue, one-time fees, and any other ancillary revenue that may be generated from the contract.
To calculate TCV, you first need to determine the length of the contract in years. Then, you need to estimate the total amount of revenue that will be generated each year from that customer. Finally, you need to discount those future revenues back to present value using an appropriate discount rate.
There are many different ways to estimate future revenues, but one common method is to use a customer’s historical spending patterns. You can also use market data or industry benchmarks to come up with an estimate. Once you have your estimate, you can then discount it back using a risk-adjusted discount rate.
The purpose of TCV is to give companies a way to measure and compare the potential value of different customers or contracts. It is a useful tool for sales teams when evaluating new opportunities and for finance teams when assessing the financial health of existing customers.
TCV can also be used as a metric for success in certain types of business models. For example, companies that rely on subscription revenues may use TCV as a way to track their progress towards long-term goals.
