KPI Series Part 2:Total Contract Values (TCVs), Annual Contract Values (ACVs), Average Selling Price
Sales teams are primarily responsible for new business generation to help a sustain a company’s growth and momentum. Over time, the performance (or lack thereof) of a sales team becomes evident through new bookings / customers added. Alongside bookings growth, there are numerous metrics that finance teams can utilize to track sales performance and collaborate with sales teams to enhance operational and go-to-market processes. We will focus on TCVs, ACVs, ASPs and ARPU as the key metrics in this article, and provide details on how and why each are essential to understand and monitor.
How Businesses Can Present Contract Values
Sales and finance teams monitor a variety of metrics on potential leads and pipeline opportunities, such as probability of close, days in pipeline and size of opportunity / contract value. Whenever a new business opportunity is converted, the contract value in the pipeline becomes a booking and can be stated on a TCV basis and/or an ACV basis. Although there are certain instances where these two terms are synonymous, classifying each of the metrics separately can improve the quality and consistency of financial and KPI reporting.
Total contract values represent the full value of a new booking over the stipulated contract term, whereas annual contract values represent only one year’s worth of the booking. Depending on the length of a company’s licenses / subscriptions contracts, TCVs can range from an annual value (in which case, they would be equal to the ACV) to multi-year values. In each of these instances, TCVs include the total amount of license, subscription and/or professional services revenue that is booked over the full contract period. On the other hand, ACVs represent the same values by revenue type over just one year. Companies have an optionality to present combined and/or separate TCVs and ACVs for each revenue type. As a best practices recommendation, segmenting bookings by revenue type into distinct TCVs and ACVs can create better internal reporting mechanisms, and also improve the ease of understanding of these key metrics by external stakeholders. The below highlights the nuances of TCVs and ACVs in businesses that sell different contract lengths and how each can be separated by revenue type:
The Linkage Between Contract Values, ASPs and ARPU
Average selling price is an additional metric used to convey average booking / revenue contributions that from a customer / user. When evaluating average selling prices for new customers, ASPs often go hand-in-hand with contract values. However, ASPs vary from contract values when evaluating them over a longer time horizon, as ASPS can include the impact of upsells / upgrades, churn and downsells / downgrades. This drives fluctuations in ASPs, whereas contract values are typically static, as they are used as the basis for quoted prices in sales contracts.
Similar to ASPs, average revenue per user defines the average revenue contribution provided by a user. Depending on a company’s terminology, business model and/or available data, ASP and ARPU can be identical in nature. Much like ASPs, ARPU fluctuates over time due to the effect of churn, upsells and downsells. One notable case where ASP and ARPU vary is when a company employs a user-based revenue model, where customers pay by user. In this particular scenario, the ASP would typically represent the average revenue per total customer, whereas ARPU would be calculated as the average revenue per total users. The two sections below provide additional detail on ASPs and ARPU:
Concluding Thoughts: Track Unitary Sales Data to Enhance Transparency and Performance
In order to succeed over the long-haul, every organization must have ample communication and collaboration between the sales and finance departments. New business bookings and customer / user additions are the lifeblood of a company’s growth, helping drive a path of sustained momentum and scale. By vigilantly monitoring and understanding the variances between key per unit sales and bookings metrics such as contract values, ASPs and ARPU, finance teams can equip their sales team members with the right data to focus on the right type of customer and continually improve pipeline conversion and other go-to-market processes.