How does TCV relate to other SaaS revenue metrics?
TCV is one of several metrics SaaS companies can use to understand different aspects of their revenue. It’s important to remember, though, that different metrics tell different stories and some, by nature of how they’re calculated, don’t tell the full story or can obscure important insights.Â
To use metrics effectively, you need to understand how they relate to each other so you can determine which one is the best metric to use based on what you need to know. Â
Now that you know how TCV relates to ACV, let’s take a look at how it relates to some of the other more common revenue metrics SaaS companies typically track.
Annual recurring revenue (ARR)
ARR is the recurring revenue from subscriptions, normalized over a period of one year. Based on this definition, ARR captures revenue only from subscriptions. Unlike TCV, it does not include one-time fees and often also excludes variable fees and consumption-based fees. Â
So, you might be wondering at this point whether TCV is a more accurate representation of revenue than ARR. After all, it accounts for more of the revenue actually being generated, right?
The answer to this question is that ARR and TCV differ in purpose. Both are useful because each gives you a different piece of the revenue puzzle.  Â
Recall that TCV is a metric that helps you understand total revenue when you’re dealing with multi-year contracts, which can be very useful in planning. In contrast, ARR is used to understand recurring revenue regardless of whether you have monthly or yearly plans and/or multi-year contracts, which offers a different perspective.Â
ARR is probably the most widely used metric in SaaS today and with good reason. ARR not only gives you a quick way to track gross sales, it also offers a lot of valuable insights into different aspects of your business that can impact revenue, including sales, customer success and satisfaction, and a customer’s lifetime value (LTV).  Â
Subscription Revenue
Subscription revenue is the money a company earns when a customer enters into an agreement to pay a recurring fee in exchange for its product or service for a specified period of time.Â
When calculated as an annual number, subscription revenue is really just another way of referring to ARR. Likewise, calculating your subscription revenue as a monthly number will tell you your monthly recurring revenue (MMR).Â
Subscription revenue is calculated based on the pricing model you use in your SaaS business, such as flat-rate pricing, tiered pricing, usage-based pricing, or hybrid pricing, which combines two or more pricing models. Â
The main difference between TCV and subscription revenue is that the latter does not include one-time fees. Subscription revenue can, however, include consumption-based fees and variable pricing as part of a hybrid pricing model, as long as they are recurring in nature as part of a subscription.Â
Customer Lifetime Value (LTV)
TCV and LTV are different ways of looking at revenue. TCV measures the total value of an existing contract (or all contracts if you’re calculating an aggregate TCV). Whereas, LTV is the average recurring revenue (adjusted for churn and gross margin) that your customers generate over their entire relationship with your business.Â
The main difference between TCV and LTV is that the former represents revenue from actual existing contracts with your customers while LTV is based on projections.
In comparison to TCV, calculating LTV is more complicated with different LTV formulas you can use depending on whether you’re interested in the unit economics at the customer level or for every dollar of ARR the customer will generate. Your pricing model can also influence how you calculate LTV. While the definition of LTV suggests that it considers only recurring revenue, it may make sense for you to include one-time service fees if they make up a significant portion of your revenue.   Â
Remaining Performance Obligation (RPO)
Remaining Performance Obligation (RPO) is an indicator of the revenue a company expects based on executed contracts that have not yet been fulfilled as of the end of a reporting period. It is the sum of deferred revenue (advance payments for services not yet delivered) plus backlog (the amount of money contracted but not invoiced) within a defined period of time.Â
Due to its relative simplicity, TCV doesn’t capture this nuance. Calculating TCV across all your contracts simply measures their total value, which doesn’t take into account how much revenue is remaining to be billed for them. Thus, RPO is a more granular metric than TCV. So, is it a better metric? That depends on the question you’re asking.Â
RPO is very important for accounting in SaaS because SaaS products often involve complex pricing and renewal options not typical of other industries. It’s also useful for giving prospective investors quick insight into a company’s future revenues. However, RPO has little utility in the planning context. For this, TCV and other revenue metrics are generally more useful.Â