What is ACV?
Annual Contract Value (ACV) refers to the annualized revenue per customer contract. It represents the average annual dollar amount a contract is worth. ACV is an important financial metric for SaaS companies and companies that predominantly deal with yearly subscriptions and contracts.
With a SaaS or subscription-based business model, each deal has its own dollar value over varying periods of time. ACV makes it easier for these companies to calculate the yearly revenue from all these varying contracts. Having a solid understanding of ACV helps companies understand the value of each client and provides them with a plan for growth going forward.
How to calculate ACV
ACV = Total Contract Value / Total Number of Years of Contract
To calculate your ACV for a single contract, simply divide the total contract value by the number of years in the contract. Let’s say a customer signs a 3-year contract worth 5,000 (5,000).
ACV represents annualized value. If the contract is written up every month, you can calculate ACV by multiplying a contract’s Monthly Recurring Revenue (MRR) by 12. For example, for a customer with a monthly subscription worth 1,200 ($100* 12 months).
ACV is not a standardized metric, meaning companies calculate it differently. You may or may not exclude one-time fees such as training, administrative, or set-up costs. For companies that include one-time fees in ACV, the first year’s ACV will usually be higher than for the rest of a multi-year contract.
Note that ACV benchmarks vary depending on the industries you serve or the type of solution you offer. Therefore, you won’t find a typical ACV for SaaS companies at large. For instance, Companies with a B2B business model will generally generate higher ACV than those with a B2C model..
ACV vs. ARR
ACV and ARR (Annual Recurring Revenue) are both key performance indicators that cover revenue and are measured annually. That makes them pretty easy to mix up.
There’s one major difference between them, however. ACV is generally used to measure a single contract or account, while ARR aggregates recurring revenue for all your customers.
Also, while ACV calculation isn’t standardized, and you can choose to include initial or one-time fees, the ARR formula is standardized across most companies. ARR does not include these sorts of fees.
Benefits of measuring ACV
While ARR is often used by C-level executives, founders, and sales leaders to measure overall revenue growth, compare the company against the competition, and demonstrate growth to investors, ACV is generally more useful for sales and marketing teams. Here’s why.
Measuring Sales Representative’s Performance
You can analyze the average ACV by the account owner to evaluate and compare each individual sales representative’s performance. By looking at every account’s ACV and matching it to the salesperson who secured the sale, you can calculate how much annual revenue that rep generates. You can also see who is successfully identifying opportunities to cross-sell and upsell. This helps identify opportunities by engaging the sales reps with below-average ACV customers.
Allocating Sales and Marketing Resources
By segmenting customers by industry and analyzing ACVs, you can identify markets and customers that generate the most revenue. Then, when it’s time to plan sales and marketing initiatives, you can task your team with focusing on the highest-value customers.
Evaluating the Success of Sales/Marketing Strategy
ACV can provide valuable insights into how efficient your sales and marketing strategies are, especially when used in conjunction with other sales metrics, such as Customer Acquisition Cost (CAC) or Annual Recurring Revenue (ARR). For example, if the ACV is lower than the cost of acquiring the customer (CAC), it might suggest that you spend too much time securing contracts. If this is the case, you’ll want to evaluate your sales process for efficiency.