TCV (Total Contract Value) is the total economic value of a customer contract over its entire agreed duration, including all one-time fees, recurring payments, and any add-on products or services.
TCV is an important metric for sales organizations as it provides a complete picture of a deal's value—unlike ACV (Annual Contract Value), which only measures the annual value.
TCV = (Monthly/Annual Recurring Payment × Contract Length) + One-Time Fees
Or more detailed:
TCV = MRR × Number of Months + Implementation Fee + Training Fee + Other One-Time Costs
| Element | Value |
|---|---|
| Monthly subscription | $2,250 |
| Contract length | 24 months |
| Implementation fee | $7,500 |
| TCV | $61,500 |
Calculation: ($2,250 × 24) + $7,500 = $61,500
| Element | Year 1 | Year 2 | Year 3 | Total |
|---|---|---|---|---|
| Annual license | $75,000 | $75,000 | $75,000 | $225,000 |
| Implementation | $30,000 | - | - | $30,000 |
| Training | $11,250 | - | - | $11,250 |
| Premium support | $7,500 | $7,500 | $7,500 | $22,500 |
| Total TCV | - | - | - | $288,750 |
Some contracts have built-in price increases:
| Year | Annual Payment | Escalation |
|---|---|---|
| 1 | $45,000 | - |
| 2 | $47,250 | +5% |
| 3 | $49,613 | +5% |
| TCV | $141,863 | - |
| Metric | Definition | Use Case |
|---|---|---|
| TCV | Total value over entire contract | Deal sizing, commission on large deals |
| ACV | Annual recurring value | Deal comparison, annual quota |
| ARR | Annualized recurring revenue | Company valuation, growth measurement |
| MRR | Monthly recurring revenue | Cash flow, monthly performance |
Salesperson receives commission on entire contract value at close:
Advantage: Strong incentive to close longer contracts
Disadvantage: High upfront payout, risk with early churn
Base commission on first year's value plus bonus for longer contracts:
| Contract Length | ACV Commission | TCV Bonus | Total Rate |
|---|---|---|---|
| 1 year | 10% | 0% | 10% |
| 2 years | 10% | +2% | 12% |
| 3 years | 10% | +4% | 14% |
Commission is spread over the contract's duration:
| Timing | Payout |
|---|---|
| At close | 50% of commission |
| After 12 months | 25% of commission |
| After 24 months | 25% of commission |
This model reduces risk from early customer churn.
When quotas are set based on TCV, consider:
| Rep | Deals | Total ACV | Total TCV | ACV Quota ($150K) | TCV Quota ($300K) |
|---|---|---|---|---|---|
| Anna | 5 × 1-year | $150,000 | $150,000 | 100% | 50% |
| Bob | 3 × 3-year | $90,000 | $270,000 | 60% | 90% |
With TCV quota, Bob is rewarded for closing longer contracts, even though his ACV is lower.
A salesperson negotiates with a customer on two options:
| Option | Annual Price | Length | Discount | TCV |
|---|---|---|---|---|
| A: 1-year | $60,000 | 1 year | 0% | $60,000 |
| B: 3-year | $54,000 | 3 years | 10% | $162,000 |
With TCV-based commission (8%):
The salesperson has strong incentive to close the 3-year deal.
TCV is an essential metric for understanding the full value of customer contracts, especially for multi-year agreements. By incorporating TCV into your commission structure, you can motivate salespeople to focus on long-term customer relationships and larger contract values.
Want to optimize your TCV-based commission? Prowi can automatically calculate commission based on TCV, ACV, or hybrid models. Book a demo to see how we can help you set up the right commission structure.