The digital agency space is more competitive than ever: the number of U.S. digital agencies has increased by 54% from 2018 to 2023.
Standing out among all this competition to retain your clients and maintain (and grow) profitability is likely your top priority.
How do you get the edge? With a firm understanding of your clients and some solid strategies that make your contracts more valuable and profitable.
Agencies with deep knowledge of clients’ needs and the game plan to address them are more likely to enjoy lucrative relationships and higher customer lifetime value.
The first step? Finding out the total contract value (TCV) of your existing contracts. Below, we’ll dive into some of the benefits of determining your TCV and provide some actionable strategies you can implement today to give it a boost.
What is the total contract value?
TCV takes an account’s recurring revenue and any one-time fees and calculates the total revenue amount you receive from that client.
The fees that are calculated in the TCV can be subscription, implementation, onboarding, or other professional fees tied to the client’s account.
TCV is a valuable metric your agency can use to determine how much revenue each contract generates.
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Formula for calculating total contract value (TCV)
Total contract value = Monthly recurring revenue (MRR) x contract term length (CTL) + one-time fees
The important thing to remember is that TCV can increase or decrease if the factors involve change. For example, if a company extends its contract, the TCV changes.
Example of TCV
Let’s use one of our customers as an example of how to figure out TCV. Say our client signs up for Teamwork’s most popular plan, the Grow plan, for 20 users. They sign up for one year. These numbers shake out to:
MRR = $399.80
CTL = 12 months
Teamwork doesn’t charge professional service or onboarding fees, so the one-time fees = $0
We would calculate the customer’s TCV like this:
$399.80 X 12 + $0 = $4,797.60
The total contract value for this client is $4,797.60. However, if this client changes their subscription or contract length, the TCV changes, too.
Benefits of understanding your agency’s TCV
There’s more than one reason why the total value of a contract is an important metric. Using TCV provides agencies with a unique look into client accounts that other key performance metrics (KPIs) and objectives and key results (OKRs), as essential as they are, don’t.
Provides data insights into your clients
“We have 100 billing customers” may sound like you’re on the right track, but this statement tells you little about your agency’s financial health. That’s why using metrics to understand the data inside your client accounts is crucial. Agencies that use data like the TCV can gain both short-term and long-range benefits. TCV:
Offers a snapshot of where revenue stands
Provides a more realistic measurement of your financial solvency
Adds value because the metric is based on actual signed contracts
Exploring these data-driven insights arms your agency with the know-how to scale, further increasing your profitability.
Helps agencies better understand their ideal customer profile (ICP)
Knowing what your clients need will help you establish long-term and profitable relationships with them. A good understanding of your clients can positively affect your agency’s growth and viability.
Calculating the contract's total value helps you see beyond how much your client brings in. It offers insight into what they’re worth to your agency. This data is valuable in how you service them, other products you may promote to them, and whether you’ll try to land new customers that are similar to them.
Agencies that accurately target, onboard, and support their ICPs can increase their average revenue and decrease their churn rate.
Allows for better revenue-based decisions
Just like customer acquisition cost (CAC), annual recurring revenue (ARR), lifetime value (CLV), and other traditional metrics, TCV takes the guesswork out of decision-making by empowering data-driven decisions.
Do you need to hire new sales team members? Should you pour more money into your marketing efforts? Do you have the capital to invest in new technology? Would it be smart to update your pricing strategy?
You can address all these questions (and more) when you know the TCV of every one of your customers.
Helps evaluate marketing campaigns
Knowing which customers bring in the most revenue for your agency is key to success. TCV calculations can be used along with other metrics to help agency leaders identify their most profitable clients and determine which customer segments are the most beneficial.
For example, mid-sized companies may prove to be more profitable than large companies (or the other way around). When you know your most profitable customer demographics, you can allocate more time and resources marketing to them and fewer resources on low-profit segments.
TCV, combined with CAC and ACV, creates a helpful roadmap for marketing. Deciding on the messages that resonate with your best prospects, the channels to distribute the message, and the other types of marketing campaigns becomes easier (and more likely to increase ROI) with these metrics.
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Strategies agencies can implement to increase contract value
The total contract value formula accurately indicates the agency's profitability and financial health. Low total contract values signal the agency doesn’t profit as much from its clients as it could (or should).
Fortunately, there are several actionable ways to increase TCV and get the revenue moving in the right direction.
Agencies that can entice their current customers to add services can increase their TCV and their customers' LTV.
For example, widening the project scope and adding new projects and services to the contract brings about positive, lucrative results. Bigger retainers, longer, more costly projects, stronger relationships, and greater perceived value by the client all contribute to your agency’s growth and profitability.
It’s important to never oversell your clients. Even though it might seem like a profit-rich idea on the front end, the customer will most likely realize it at some point. Once that happens, it breaks the trust in the relationship and you risk losing the account. Stay focused on the client’s best interests to create long-term, profitable partnerships.
Adding complementary services to the clients’ packages is another way to increase TCV. Client support is key to making this happen by suggesting current or new services your agency offers.
Even if only a small percentage of clients add these products to their current customer contract, the addition increases profit in a way you wouldn’t have seen otherwise. (Plus, it makes your agency a more valuable vendor to them!)
3) Focusing on high-value clients
"High-value clients bring more than just revenue; they bring referrals, testimonials, and social proof that can attract even more high-value clients."
~Michael Port, American business author, speaker, and entrepreneur
Few agencies, no matter how large, have infinite resources. Spending them on the most profitable clients is a logical way to make as much money as possible.
The TCV metric pinpoints the most profitable customer types. Once agencies know this, they can funnel their energy to those clients and pour fewer resources into low-value accounts that don’t offer as many opportunities.
4) Streamlining processes
The more efficient an agency is, the more profitable it becomes. If investments in technology, additional training, and a decrease in workflow bottlenecks increase productivity, your agency can enjoy a greater profit margin on its current accounts.
5) Creating custom solutions
Getting creative can pay off big. This is especially true when working with enterprise-level clients. If you can formulate service offers tailored to their needs and specifications, you can set higher, consultative-type pricing that results in a high TCV.
6) Offering long-term contracts
One of the elements of TCV is the length of the contract. If you can convince your clients to agree to longer contracts (or get them renewed), you automatically increase TCV. Multi-year contracts help keep competitors at bay and allow your agency to establish strong relationships with the client.
Increase your contract value with Teamwork
The total contract value is a helpful metric for agencies to measure profitability and success. It’s simple to calculate and works well with other metrics for a 360-degree view of business strategies. Use it to understand their clients better, pinpoint additional opportunities, and create more effective campaigns.
Is your agency struggling to manage your project workflows smoothly? If you’re dealing with time-consuming bottlenecks and a lack of accountability with your team, check out Teamwork. Our platform is designed for agencies and offers the intuitive features you need to stay on top of projects.
Get started today and be on your way to more profitable contracts!