Contract value: what it is and why it matters

Explainer
September 17, 2022
min

We all know that contracts enable businesses to capture revenue and continue their growth. But how do they know how much revenue is captured by each contract? Well, this is called the contract value, and we’re going to explain it in more detail in this post. Let’s get started. 

What is contract value? 

Contract value, also known as Total Contract Value (TCV), is a metric used to understand the financial value of a particular contract or agreement once it’s been executed. In other words, the total contract value represents how much a contract will be worth to a business over the course of the contract’s duration.  

This figure is then used to help calculate revenue, understand how much each customer pays your company, and project growth in the future. It’s a critical data point for legal and business teams to track. 

Total Contract Value can also be used to calculate the Average Contract Value (ACV) of the customers they’ve acquired each month. This is done by using the Total Contract Value to find the Annual Contract Value of each new account. These are all added together and averaged to calculate the ACV for each month. 

But before we explore how to track contract value, let’s first understand how it’s calculated. 

How to calculate total contract value (TCV)

As we just described, the Total Contract Value is a figure that represents the full amount that a customer pays you during their contract

This sum includes the Monthly Recurring Revenue (MRR) paid to you by the customer, which must be multiplied by the number of months that the contract lasts. The total contract value also includes any additional fees that the customer pays to you, such as one-off setup fees, for example. The calculation should look something like this:

(Monthly Recurring Revenue x Contract term length) + one-off fees 

Let’s put this into perspective using an example. 

Imagine you enter into a contract for a mobile phone. The deal you have been offered says that you must pay the provider $35 per month (MRR) for 24 months for the phone itself and access to calls and data. However, they also want you to pay a one-off fee of $80 for the mobile device. This is an additional cost and will only need to be paid once. 

In this case, the Total Contract Value calculation would look like this:

($35 x 24) + $80 = total contract value 

In this example, the Total Contract Value would be $920. The calculation is actually really simple. It’s tracking these contract values (alongside other contract metrics) that can become difficult. Although, it is worthwhile.

Why is contract value an important metric?

Contracts contain a lot of data. However, Total Contract Value is a particularly important metric to measure since it ties directly back to the company’s overall sales revenue. It can also be used to inform various other business decisions, too.

Let’s explore a few more reasons why tracking contract values can be so important. 

1. Assists in predicting future growth and revenue

Tracking the contract value of your business contracts enables you to more accurately predict what your long-term revenue and growth looks like. This is important since it empowers you to budget responsibly and ensure that the company is operating in a sustainable way. 

In fact, this form of contract data is often used by finance teams to project the company’s growth and understand how healthy its finances are. 

2. Helps to inform future negotiations 

One of the best ways to increase a contract’s value is to negotiate the contract effectively to prevent value leakage. When discussing the specific details of a deal, it can be tempting to take shortcuts to get contracts over the line. 

This could mean offering hefty discounts to get contracts signed faster, or accepting the first counter-offer you receive. While discounts and counteroffers are often helpful in negotiations, it’s important to ensure that you aren’t leaving value on the table unnecessarily.

The Total Contract Value of existing contracts can enable you to do just that. By reflecting on what other customers have paid previously, you can understand what prospects’ budgets might look like, and which fees are reasonable. 

3. Highlights riskier contracts 

Another reason why it’s important to understand contract value is that it helps to de-risk contracts where necessary. If contracts have a particularly high contract value, the chances are they carry greater contractual risk

This means that they may require more oversight from legal teams or other stakeholders within the business. Meanwhile, some lower-value contracts can usually progress without even being negotiated.

4. Helps to evaluate your customer accounts

Contract value is also a useful metric when evaluating your customer portfolio. Certain customers will be paying you more than others, either because they have a larger company size or because they are on a more premium plan. Either way, it’s wise to allocate your resources accordingly. 

This information about your customers can also be used to shape your future business strategy. For example, knowing how many customers you have with a high contract value and how they found you is a great way to find new opportunities to bring in similar, high-value accounts. 

How to manage contract value in Juro

To recap: we’ve discussed what contract value means for businesses, how it’s calculated and what the benefits of tracking it are. 

What we haven’t explored is how an all-in-one contract automation platform can help legal and business teams manage their contracts based on their contract values. Let’s cover that now. 

1. Set up conditions based on a contract value 

Using Juro, legal and business teams can build rules into contracts using conditional logic. This can be done at template level, and legal teams can create these rules so that contracts are automatically pushed for approval if they meet a certain contract value threshold. 

This helps to mitigate risk within contracts by ensuring that they’ve been reviewed and approved internally if they’re of a high value.  

Similarly, Juro users can set other conditions within their contracts so that contracts with a low contract value are sent out for signing rather than being pushed to the counterparty for negotiation. This is an effective way to get contracts signed faster if they’re particularly low risk and don’t require lengthy negotiations to be finalized. 

But that isn’t all. Conditional logic can also be used to automatically add or remove certain clauses from the contract template depending on the contract value. This enables business teams to create contracts that are more robust.

By automating these safeguards and workflows based on a contract’s value, sales teams can confidently self-serve on contracts knowing that there is minimal risk when doing so. 

2. Search for and filter through contracts based on contract value 

Contracts built in Juro are built as structured data. This means that they fully searchable and can be filtered using the values within them. 

Juro’s fully customizable contract dashboards enable legal and business teams to view and filter all of their contracts based on certain values. For instance, if you want to view all vendor contracts with a Total Contract Value higher than £50,000, you could select these filters. This would display a detailed list of all of the contracts that meet this criteria, making it quick and easy to find the ones you need. 

You can also filter contracts based on their contract value and status to determine which contracts are still in the review stage of the contract lifecycle and how they should be prioritized. This filtering combination can be used to identify the blockers stopping high-value contracts from progressing. 

It’s also beneficial to have all of this information readily available in the event of a contract audit, or a due diligence process. 

Contract value is one of the most important data points when raising capital or merging with another business. Poor contract storage and a lack of visibility can hold businesses back in this stage of their growth, so adopting a tool like Juro is a wise choice. 

Fill in the form below to find out more about how Juro’s all-in-one contract automation software helps teams to streamline the creation, execution and management of legal contracts. 

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