ACV vs TCV
Annual Contract Value (ACV) and Total Contract Value (TCV) are metrics that measure contract revenue in different ways. ACV represents the average annual revenue from a contract, normalizing multi-year agreements to a single-year value, which helps with year-over-year comparisons and revenue forecasting. TCV, in contrast, captures the entire revenue commitment over the full contract duration, including all fees, one-time costs, and recurring charges across all years, providing a complete picture of the contract's financial impact.
A SaaS company should use ACV when analyzing sales team performance across deals of varying lengths or when reporting consistent annual growth metrics to investors. TCV would be more appropriate when evaluating major enterprise deals with significant implementation fees or when comparing the total financial impact of different contract options. For example, if considering whether to offer customers a discount for longer commitments, examining both metrics helps determine if the higher TCV of a three-year contract outweighs the potentially lower ACV compared to annual renewals.
Annual Contract Value
Total Contract Value
What is it?
Annual Contract Value (ACV) is the dollar amount an average customer contract is worth to your company in one year. There tends to be less universal consensus on the definition of ACV compared to some other SaaS metrics, such as Annual Recurring Revenue. For example, some companies include one-time initial charges like setup or training in their ACV calculations, while others don’t.
Total Contract Value (TCV) is the sum value of a contract over its life cycle. It takes into account not only the initial purchase price, but also any additional costs such as installation and maintenance fees that may be incurred over time. To calculate TCV, these costs must be added together to get an estimate of the total contract value over its life.
Who is it for?
Categories
Formula
Example
You have 100 customers. 30 signed a 3-year contract with a contract value of $90,000, equivalent to $30,000 / year. 30 signed a 2-year contract with a contract value of $80,000, equivalent to $40,000 / year. 40 signed a 1-year contract with a contract value of $50,000, equivalent to $50,000 / year First Year Annual Contract Value = ( (30,000 x 30) + (40,000 x 30) + (50,000 x 40) ) / 100 customers Year 1 ACV = $41,000 Second Year Annual Contract Value = ( (30,000 x 30) + (40,000 x 30) ) / 60 customers Year 2 ACV = $35,000 Third Year Annual Contract Value = (30,000 x 30) / 30 customers Year 3 ACV = $30,000
For example, if you purchase a piece of equipment for $100,000 and then have to pay a maintenance fee of $2,000 every year for five years, your total contract value would be $110,000.
Published and updated dates
Date created: Oct 12, 2022
Latest update: Mar 31, 2023
Date created: Mar 31, 2023
Latest update: Mar 31, 2023