How do I Calculate ACV & TCV?

Overview

ACV and TCV are calculated in pretty similar ways, however there's a few fundamental differences to them, mainly revolving around the time period that they represent.

They sit differently to recurring revenue as they represent other forms of revenue across each time period, rather than just recurring revenues. This includes spend areas such as implementation costs, or professional services, as well as any other one time fees or payments.

Because they represent a broader revenue picture of a deal or contract, they are more often than not the figure that finance cares the most about, even if areas like sales targets are more focussed on areas like ARR.

Becuase some one time payments (like implementation costs) can increase the value of a contract for the first year, you may hear terms such as "first year ACV", which is excplictly the ACV of the first year as opposed to an averaged value taken from TCV.

The most important thing when working with revenue is that your working definitions remain consistent, and so when using ACV you'll want to identify if you're using a figure that's an average, or referring to a specific time period/year.

The above would be used when referring to first year, 2nd year ACV etc.

This calculation also fine, however you'd have to ensure that you're dividing TCV by the year equivalent (in the case of contracts that run at inconsistent lengths)

TCV is simpler as it's not reliant on contract length, however when working with TCV you'll probably want to keep average contract lengths to hand for easy conversion to ACV equivalents.

Using ACV/TCV

ACV can be used part of the revenue formula to calculate the number of opportunities (or even leads) that you need to generate, in order to reach your revenue target. The formula is pretty simple:

In this formula, you'd probably want to use the average first year ACV for the last X months (with the opportunity close rate representing the same time period) to get a fair picture of the number of opportunities that you need to generate to get to target.