ACV vs. TCV in the SaaS industry: Differences and how to calculate each metric‍

In 2025, with an increased focus on sustainable growth and accurate financial forecasting, ACV and TCV have emerged as pivotal metrics for SaaS businesses. Understanding the nuances of ACV vs. TCV is vital for accurate financial reporting, effective sales strategies, and informed decision-making in a competitive market.

Read on to learn:

• The precise definitions of ACV and TCV
• How to calculate ACV and TCV accurately
• The specific use cases for each metric
• Common pitfalls to avoid when using ACV and TCV
• How to use ACV and TCV for SaaS pricing and sales optimization

Let’s begin with a quick comparative chart of ACV vs. TCV. 

ACV vs. TCV: Key differences explained

To provide a clear understanding of the distinctions between ACV and TCV, here's a comparative chart:

What is ACV? 

Annual contract value (ACV) represents the annualized revenue derived from a customer contract, specifically excluding any one-time fees. In essence, it measures the average yearly revenue generated from a single subscription-based customer. 

It is a key indicator for SaaS businesses that rely on recurring revenue streams. The focus is on the recurring portion of the contract, making it a valuable tool for comparing contract values across different durations.  

ACV formula

The formula to calculate ACV is straightforward:

ACV = (Normalized Total Contract Value) / (Contract Term Length in Years)

Where "Normalized Total Contract Value" means the total value of the contract minus any one-time fees.

How to calculate ACV

Let’s illustrate with an example:

Imagine a SaaS company secures a 3-year contract with a client. The total value of the contract is $60,000, which includes a $6,000 onboarding fee. The steps would go like this:

1. First, subtract the one-time fee from the total contract value: $60,000 - $6,000 = $54,000.
2. Next, divide the result by the contract term length: $54,000 / 3 years = $18,000.

Therefore, the ACV for this contract is $18,000. An ACV calculator can be used to easily compute these values.

Where ACV matters most

ACV provides a clear view of the annual revenue generated from customer contracts. It’s particularly useful for assessing short-term performance and refining business strategies. Here are some key areas where ACV plays a crucial role:  

• Sales and marketing performance: ACV helps evaluate the immediate impact of sales and marketing efforts on annual revenue. By tracking ACV, businesses can understand which strategies are most effective in acquiring high-value customers.  
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• Pricing strategy: Analyzing ACV data enables companies to optimize their pricing models for annual subscriptions. It provides insights into the average value customers are willing to commit to annually, which can inform pricing adjustments to maximize revenue.  
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• Revenue forecasting: ACV offers a solid foundation for year-on-year revenue growth projections. It allows businesses to understand the annual contribution of each customer, aiding in accurate financial planning.

What is TCV? 

When you ask, "What does TCV stand for?" the answer is total contract value. It represents the total revenue a business expects to receive from a customer over the entire duration of their contract. 

It encompasses all revenue streams, including recurring subscription fees and any one-time charges like implementation or setup fees. Basically, TCV provides a complete view of the total financial commitment a customer makes.

TCV formula

The formula for calculating TCV is:

TCV = (Monthly Recurring Revenue x Contract Term in Months) + One-Time Fees

How to calculate TCV

Here’s a practical example:

A SaaS company signs a customer to a 2-year (24-month) contract. The monthly subscription fee is $2,500. The contract also includes a one-time implementation fee of $5,000. Here is how you’d go about using the formula: 

1. First, calculate the total recurring revenue: $2,500 x 24 months = $60,000.
2. Then, add the one-time implementation fee: $60,000 + $5,000 = $65,000.

Therefore, the TCV for this contract is $65,000.

Where TCV matters most

TCV provides a broad perspective on the overall value of customer contracts. It’s invaluable for long-term financial planning and strategic decision-making. Here are key areas where TCV is essential:

• Long-term financial planning: TCV helps businesses understand the total revenue commitment from their customer base over extended periods. This information is crucial for forecasting future revenue, planning resource allocation, and making informed investment decisions.
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• Strategic growth decisions: By analyzing TCV, companies can identify high-value customer segments and tailor their strategies to attract and retain those customers. TCV sales data gives a clear picture of where to focus sales efforts.
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• Investor and stakeholder reporting: TCV offers a clear and concise way to communicate the overall value of customer contracts to investors and stakeholders. It demonstrates the long-term financial health and potential of the business.

Using ACV vs. TCV in SaaS pricing and sales

ACV vs. TCV analysis allows for a deeper understanding of customer value and revenue potential. By using these metrics, SaaS companies can attract high-value clients and show financial stability. Here’s how ACV and TCV shape subscription pricing specifically.

ACV and TCV in subscription pricing

ACV and TCV play distinct roles in shaping subscription pricing strategies. ACV offers a granular view of the annual revenue generated per customer, which informs the setting of competitive annual subscription rates. It facilitates analysis of year-over-year revenue growth. 

TCV, on the other hand, provides a holistic view of the total revenue commitment over the entire contract lifecycle. 

As stated before, ACV vs. TCV analysis is crucial when determining the best price points for various subscription plans. It guides the structuring of multi-year contracts, often with tiered pricing and incentives.

How sales teams use these metrics

Sales teams leverage ACV and TCV to improve their sales strategies and prioritize high-value opportunities. Here’s how they use each one:

• ACV helps pinpoint and target customer segments with the highest annual revenue potential, allowing sales reps to focus on closing deals that maximize yearly recurring revenue.
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• TCV guides the structuring of long-term contracts that maximize the total value of user relationships, supporting the negotiation of favorable contract terms, including discounts for extended commitments.

Investor perspective: Why ACV and TCV matter

Investors scrutinize ACV and TCV to assess the financial health, stability, and growth potential of SaaS companies. Here’s what a company’s ACV and TCV mean to investors: 

• ACV indicates the consistency and predictability of recurring revenue streams, demonstrating the company's ability to generate sustainable annual growth.
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• TCV reflects the overall value of customer contracts and the company's long-term revenue potential, signaling the ability to secure substantial revenue commitments over extended periods.

The role of discounts and one-time fees in ACV vs. TCV

Discounts and one-time fees introduce crucial variations in the calculation and interpretation of ACV and TCV. One-time fees are included in TCV, providing a complete view of the total contract value, while they are excluded from ACV, focusing the metric on recurring annual revenue. 

Strategic discounts, particularly for multi-year commitments, can drive higher TCV while potentially affecting ACV. Contract length directly impacts the difference between ACV and TCV; longer contracts will cause a larger divide between the two metrics.

ACV vs. TCV: Which metric matters more?

The choice between ACV and TCV hinges on the specific insights you seek. Both metrics offer valuable perspectives, but their relevance varies depending on the scenario. For example:

• If you need to assess annual revenue performance, analyze year-on-year growth, or evaluate the immediate impact of sales and marketing efforts — use ACV.
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• If you're focused on long-term financial planning, understanding the total value of customer contracts, or reporting to investors on overall revenue potential — use TCV.

Contract length and renewals

Contract length greatly influences the relationship between ACV and TCV. Shorter contracts tend to minimize the gap between the two metrics, as the total contract value is closer to the annual value. 

Conversely, longer contracts create a wider disparity, highlighting the importance of TCV for long-term revenue visibility. 

Renewals further emphasize the significance of both metrics. ACV provides insights into the annual recurring revenue from renewals, while TCV helps forecast the long-term value of sustained customer relationships. 

Remember: ACV vs. TCV both show the financial health of a company but from different time perspectives.

Financial and sales reporting of ACV and TCV

Accurate reporting of ACV and TCV is essential for informed decision-making in finance and sales for your SaaS company. Here’s how it should be done in both finance and sales:

Finance 

Finance teams should track ACV and TCV separately to provide a comprehensive view of revenue performance. ACV reporting should focus on annual trends, highlighting growth or decline in average contract values. 

TCV reporting should emphasize the total value of signed contracts, providing insights into future revenue potential. 

Both metrics should be included in financial dashboards and reports, along with other key SaaS business metrics, to give a complete picture of the company's financial standing.

Sales

Sales teams should use ACV to monitor the performance of individual reps and sales campaigns. TCV should be used to evaluate the long-term value of customer relationships and guide deal structuring. 

Regular reporting on ACV and TCV can help sales leaders identify high-performing segments and improve sales strategies. Sales reporting should also include details on contract length, discounts, and one-time fees to provide context for ACV and TCV values, allowing for a more nuanced understanding of sales performance.

Common mistakes and misinterpretations

Even with clear definitions, missteps in applying ACV and TCV can lead to inaccurate financial insights. Let’s zoom in on some common mistakes and how to avoid them:

Mistaking ACV for ARR (annual recurring revenue)

A frequent error is conflating ACV with ARR. While both metrics relate to annual revenue, they serve different purposes. ACV focuses on the average annual value of a single contract, excluding one-time fees. 

ARR, conversely, represents the total recurring revenue generated by all active subscriptions within a year. To avoid confusion, remember that ACV is contract-specific, while ARR is a company-wide metric.  

Overlooking one-time fees in TCV calculations

Another common mistake is neglecting to include one-time fees, like setup or implementation costs when calculating TCV. It leads to an understated view of total contract value. Always make sure that all revenue streams associated with a contract are accounted for in TCV calculations.  

Why contract length misunderstandings impact forecasting

Misinterpreting contract length can seriously distort forecasting. For ACV, the contract term is crucial for annualizing revenue. If a multi-year contract is mistakenly treated as a single-year agreement, the ACV will be inflated. 

In TCV, the total duration directly determines the overall contract value. Double-check all contract terms to ensure accurate calculations.  

How discounts and upgrades affect ACV vs. TCV

Discounts and upgrades can complicate ACV vs. TCV analysis. Discounts, especially those applied to multi-year contracts, may lower the ACV but still contribute to the overall TCV. Upgrades, on the other hand, typically increase both metrics. 

To maintain accuracy, track discounts and upgrades meticulously and adjust calculations accordingly. Documenting the changes will help keep the revenue picture clear.

FAQs

How is ACV different from ARR?

ACV is the average annual revenue per contract, while ARR is the total annualized recurring revenue for all active subscriptions. ACV focuses on individual contracts, and ARR focuses on the whole company.

Should one-time fees be included in ACV?

No, one-time fees are excluded from ACV calculations. ACV focuses solely on recurring annual revenue.

Can ACV be higher than TCV?

No, ACV cannot be higher than TCV. The TCV represents the total contract value, which includes all revenue, while ACV is a portion of that, annualized.

How do discounts affect TCV calculations?

Discounts reduce the total revenue recognized over the contract's duration, therefore lowering the overall TCV. All TCV calculations must incorporate all applicable discounts to be accurate.

Use Orb to integrate both ACV and TCV into the revenue planning process

We've explored the critical differences between ACV vs. TCV and their importance for SaaS businesses. Now, learn how Orb can help you integrate these essential metrics into your revenue planning with precision and ease.

Orb is a done-for-you billing platform. It’s designed to provide SaaS and GenAI usage-based billing companies with the tools they need to unlock their usage data, enabling flexible pricing, seamless billing, and accelerated growth — all without the limitations of rigid billing systems.

Here's how Orb helps you effectively manage and use both ACV and TCV:

• Accurate revenue recognition for both ACV and TCV: Orb meticulously tracks all revenue components, including recurring subscriptions, one-time fees, and usage-based charges. 
  
  It provides a precise view of your TCV by capturing all contract values, while also allowing you to isolate and analyze the annual recurring portions essential for ACV calculations. You get accurate revenue forecasting and reporting for both metrics.

• Agile contract modeling for better pricing strategies: Orb allows you to model diverse contract terms and pricing models, letting you analyze various scenarios and optimize your pricing strategies for maximum ACV and TCV.
  
  Using the Orb SQL editor, and the Rev Graph, your business teams can launch new pricing without needing technical expertise. This advantage allows for the testing of pricing changes using historical data.

• Granular usage tracking for informed revenue decisions: Orb's detailed usage tracking provides valuable insights into customer behavior and product usage. This data can be used to spot trends, predict future revenue streams, and fine-tune pricing models to maximize both annual and total contract values.
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• Reporting and analytics for strategic insights: Orb offers robust financial reports and analytics dashboards that provide a clear picture of your ACV and TCV performance. These insights help you identify high-value customer segments, track key metrics, and make data-driven decisions to boost revenue growth.
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• Integrations for data consistency and efficiency: Orb integrates with popular CRM, accounting, and data warehousing tools, guaranteeing data consistency across your entire tech stack.
  
  This feature simplifies billing operations and eliminates data silos, allowing for a unified view of your ACV and TCV data.

• Partnership and guidance: Orb acts as a trusted thought partner, offering expert guidance and support to provide successful adoption and optimization of usage-based pricing strategies. 

Ready to leverage the full potential of ACV and TCV? Explore our flexible pricing options to find a plan that perfectly aligns with your needs and empowers your business growth.