What is total contract value?
Total contract value, or TCV, is the entire value of a contract over its full term, including recurring revenue and any one-time fees. A three-year deal at 100,000 dollars a year with a 20,000 dollar setup fee has a 320,000 dollar TCV.
TCV is the headline deal number. It is useful for sizing a sales agreement, but only the recurring part becomes ARR.
The TCV formula.
TCV = annual recurring value times the term in years, plus one-time fees. The recurring portion is what flows into ARR; the one-time fees do not.
Keep the recurring and one-time pieces separate. Mixing them is how TCV gets mistaken for ARR.
A worked example.
A three-year contract is worth 100,000 dollars a year in recurring revenue, with a 20,000 dollar one-time setup fee. TCV is 100,000 times 3, plus 20,000, which is 320,000 dollars.
What is a good TCV?
TCV scales with deal size and contract length, so there is no benchmark. A long enterprise contract will have a large TCV that says little about whether the deal is healthy. The number to watch alongside it is ACV, which normalizes for term.
Do not report TCV as revenue or ARR. A 320,000 dollar TCV on a three-year deal is 100,000 dollars of ARR, not 320,000.
How to grow your TCV.
Longer terms, larger annual values, and added services all raise TCV. Multi-year deals in particular inflate it, which is why TCV and ARR must be reported separately.
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