Despite the many benefits of TCV for SaaS companies, there are some restrictions that you should keep in mind. The principle of income recognition is a question that often comes up. If the total value of ordering a three-year contract is $1,000 per year, you can assume that you have a $3,000 customer on your books. But is that true? This $3,000 is actually deferred revenue, as the customer may be able to terminate half of the contract and refuse to pay in the next billing cycle, which could devastate your revenue forecast. You may have punitive clauses in all your contracts, but will you really enforce them? In such cases, you should only consider dealing with prepaid transactions if you use TCV for financial forecasts. You don`t need to have a large ACV to have a successful business. You need to implement the right ACV strategy. Many software as a service (SaaS) companies have built a large business based on small values of the ACV. If you have a small ACV, then you must have a low CAC. You`ll also be able to see if you miss opportunities to market contracts of different lengths or apply discounts to make people think they`ll get a better deal. This information gives your sales team a head start on the competition.
For example, for a continuous contract worth $100 per month, you can specify exactly that fee. The next screen shows how this contractual value can be indicated. No single metric can serve as a perfect indicator of the health of the company. The world of SaaS has companies with a surprisingly low average customer value over the duration of their contracts, and yet these can be some of the fastest growing companies. If the value of the contract is revalued, it can be identified for the relevant financial data set, you can enter either numerical values or percentages. Suppose there is a boarding fee? Don`t forget to add one-time fees that could be generated by a customer. If the tax was $10, the same three-month contract has a total value of $160. Don`t forget here that you can`t describe month-to-month contracts as “infinite” contractual values. It`s a bit ridiculous when you write it like that, but a surprising number of people think of recurring contracts, as if they were forever. The total value of the contract only lasts until the renewal date arrives.
Understanding the contractual value is essential to creating a viable business. If you apply the wrong strategy to acquiring customers, you can bankrupt your business before you even start.