Key SaaS Metrics: What's the Difference Between ACV and TCV?

Key SaaS Metrics: What’s the Difference Between ACV and TCV?

Software-as-a-Service (SaaS) companies need to determine the most useful way to measure the value of client contracts. Do you judge customers based on how much they’ve agreed to pay you per year, or by how much they’ve agreed to pay you over the entire life of their contract?

These two metrics are referred to as Annual Contract Value (ACV) and Total Contract Value (TCV). Naturally, SaaS startups need to know, what is ACV in sales, how does it differ from TCV, and why are these two key SaaS metrics so important? Luckily, that’s exactly what we’re about to discuss.

ACV vs. TCV

As well as being confined to the first year of any contract, ACV can also be constrained in other ways to account only for certain elements of a contract. TCV, meanwhile, must incorporate everything—all years and all elements of the contract.

There are various methods used to calculate SaaS ACV, so it can be a confusing metric for startups to use and impractical for inter-organizational comparison. For instance, you can decide to include certain costs or elements in the ACV calculation, such as one-time upfront payments that customers pay as part of their contracts—or not. You can decide to modify the ACV to reflect your average churn rate—or not. You can identify your ACV of the total of all ACVs from all contracts, or the average ACV across all contracts.  

TCV is somewhat more straightforward, since by nature it incorporates all costs associated with the contract. So that $1,000 startup fee would definitely be included in TCV, as would any products or services the customer added to the core contract. TCV metrics can incorporate renewal bookings and multiple terms. 

Should You Track ACV or TCV?

Since TCV is a more standardized measure, it better allows you to compare your company to others and get a sense of reasonable goals. It also allows you to predict revenue, since you are accounting for all years of all your contracts.  

However, both metrics are useful in different ways. With its multi-year lens, TCV allows you to predict your future (somewhat), so you can manage your spending and resources as you grow. Yet if customer retention and growth rates are difficult to predict for whatever reason, ACV can be a useful substitute to use in planning. ACV is also a useful for seeing trends in annual growth numbers.

Other important SaaS Metrics

ACV and TCV are key SaaS metrics every tech startup should be tracking, but that’s not to say they are the only important metrics. If you want to evaluate the success or failure of your sales and marketing campaigns and determine whether or not they are worth the money you’re putting into them, you should be calculating how long it takes to effectively pay back your costs with the money earned from the new sales generated by your sales and marketing efforts, otherwise known as CAC ratio (or Customer Acquisition Cost ratio). You will probably also want to know how to calculate Gross Margin and Cost of Goods Sold (COGS), which are key metrics investors use when evaluating a company for potential funding.