Learn how to calculate Total Contract Value, an important metric for running an online subscription-based service
If you are running an online subscription-based service, one of the metrics you should calculate is the total contract value, or TCV. It describes the amount of revenue you can generate from the contracts that you have. You will learn more about TCV in this article.
What is total contract value (TCV)?
The total contract value (TCV) is simply the total revenue generated from a single contract with a customer.
Contracts are usually written with either a one-time calculation of total value for short-term projects or recurring monthly payments for long-term contracts. Both of these methods include the initial costs that you add to the contract. For short-term contracts, TCV is simply the total value listed in the contract. For long-term contracts, TCV can be calculated as follows:
The same formula can be used for recurring monthly payments for open-ended contracts, such as those for online subscriptions.
Why should you calculate TCV?
There are three reasons why you should calculate TCV:
Helps you predict your revenue more accurately
As TCV refers to existing contracts, it provides us information about secured revenues for a given time period. TCV therefore provides an accurate baseline and even a lower estimate of the revenues for the near future.
Identify your most valuable customers
As TCV is calculated for each contract, this metric gives us valuable information about the amount of revenue an individual customer can bring. Thus, you can use TCV to create a profile of your market, helping you identify your most valuable customers and then offer them better deals to retain them for a long time.
Optimize your marketing strategy
TCV allows you to assess the effectiveness of the different aspects of your marketing strategy, from brand awareness to even the packages you offer to your customers. A general increase in the TCV for each contract can mean that the strategies you deploy and the packages you offer are effective and should be continued.
What are the precautions in using TCV?
While TCV is a powerful metric, there is always risk and uncertainty that can change the value of TCV, which you should take note of. Two sources of risk and uncertainty in TCV are the following:
Not all customers will continue their subscriptions or complete their contracts. Even if there are cancellation fees stipulated in the contracts, the loss of a reliable source of revenue needs to be accounted for by recalculating TCV.
Some of your customers could one day decide to avail of a pricier package which has more features than their current package. This would bring more revenues to your business, which is a good thing, but if you do not recalculate TCV, your subsequent data analysis will not reflect this positive development.
How can you improve your TCV?
There are several ways to improve your TCV. We will focus on two of them in this section.
Adjust your prices
Perhaps you are pricing your offers too low. This could be true if you offer a service that your customers really like - reflected with the growth of your business. When you do so, however, make sure there is a strong justification, such as costs, and an improvement of the features must be present as much as possible.
The reverse might also work as well: lowering the prices may lead to you enticing more customers to sign longer-term contracts, thus boosting your TCV as well. To stay informed, regularly conduct market research to keep yourself in touch with your customers.
Focus on upselling
If you are trying to win over a long-term customer, there is a chance that you may convince them to choose a more expensive plan depending on their actual needs. The needs of your current customers may also change, which can include adding new features to their subscription package. Either way, there is an opportunity to upsell, increasing your TCV! As long as done with due respect to the prospective customer, there is always a potential for upselling!