Annual Contract Value vs. Total Contract Value

Annual Contract Value and Total Contract Value are both metrics for calculating the value of your contracts with customers. Despite the fact that they measure the same thing, however, the two metrics provide very different information about the true value of your contracts.

Here are the most important things to understand about both of these common ways to measure the value of your contracts, including how to calculate each and what they’re useful for.

This content is for general educational purposes only and is not intended, and should not be considered, legal advice.

What is Annual Contract Value?

Annual Contract Value, or ACV, is the average revenue that the contract generates for your organization in a year. For example, if an average customer signs a three-year contract for $30,000, then that contract has an ACV of $10,000.

Companies that sell their products and services via contracts use ACV to calculate how much money they make from each customer per year. 

How to calculate ACV

ACV = Total contract value (excluding one-time feeds) / total years in contract

Pros of calculating ACV

• Helps establish accurate annual revenue calculations, which can help you establish a more granular understanding of annual revenue to plan for year-over-year growth.

• Helpful for understanding the effectiveness of marketing and sales initiatives. Compare the cost of a marketing/sales initiative to how much revenue it brought in (ACV of contracts x number of contracts closed via campaign) to assess how effective your campaign was.

• Great for making the case for retention. ACV is an excellent metric for demonstrating the true value of retaining customers and re-signing contracts.

Cons of calculating ACV

• Does not calculate total revenue generation. ACV is an average metric and it does not account for one-time purchases or other sources of non-subscription revenue.

• May be difficult or impractical to calculate. ACV will not necessarily be an applicable metric for all contract-based businesses, especially if the price of contracts varies widely.

• Cannot calculate attrition: ACV provides no understanding of how many contracted customers cancel or fail to renew their contracts.

What should you use ACV for?

• Assessing the impact of contracts on annual revenue and year-over-year growth

• Analyzing the annual performance of marketing and sales initiatives

• Making the case for investing in customer retention and Customer Relationship Management

What is Total Contract Value?

Total Contract Value, or TCV, is the total revenue that a customer’s contract generates for a company. For example, if a customer signs a three-year contract for $30,000 a year and pays a one-time upgrade fee of $5,000 in year two, then the TCV of the contract is $95,000.

Companies that sell their products and services via contracts use TCV to calculate the total revenue they make from a given contract.

How to calculate TCV 

TCV = Monthly recurring contract fee x (times) length of contract + (plus) all one-time fees

Pros of calculating TCV

• Holistic measurement of value. TCV incorporates every source of revenue you earn from a customer, which means it provides a more thorough understanding of the value of a given customer than ACV.

• Helps optimize sales targeting. By looking for patterns of behavior and demographics among your customers with the highest TCV, you can learn whom to target with sales and marketing initiatives for better lead scoring.

• Highly useful for optimizing marketing initiatives. By dividing TCV by your customer acquisition cost, you can directly see how efficiently you’re bringing in new customers and understand where your most efficient marketing channels are.

Cons of calculating TCV

• Cannot account for deferred revenue. TCV assumes you will receive the full revenue the customer signed up for, but this is not always the case. If your customer cancels their contract before it is scheduled to be renewed, for example, they could supply you with less revenue than you calculated they would.

• Less useful for predicting revenue. Because TCV is assumptive and includes one-time purchases that customers may not predictably repeat, TCV isn’t always reliable for predicting the actual (not projected) revenue a customer will provide. 

• Not as granular as ACV. TCV is useful for understanding broad long term value, but less useful for understanding how that value can help you make annual plans.

What should I use TCV for?

• Understanding and targeting your most potentially valuable customers

• Optimizing the length and price of your contracts

• Optimizing your marketing budget and distribution

Capture the critical business value that’s hiding in your agreements - learn about Intelligent Agreement Management (IAM).

This content is for general educational purposes only and is not intended, and should not be considered, legal advice. Laws frequently change and this information may not be current or accurate. Docusign disclaims all warranties of any kind with respect to this material including merchantability, fitness for a particular purpose, or accuracy. You should consult with a licensed attorney in your area for legal advice.