Annual contract value (ACV)
Definition
Annual contract value (ACV) is the average annual revenue that is generated from each customer’s contract excluding any fees. It’s a metric used to measure and track the value of a customer contract over its lifespan. ACV is important for understanding the health and performance of a business, as it can be used to measure customer churn, customer lifetime value, and other key metrics.
How is Annual contract value (ACV) calculated?
ACV can be calculated in a number of ways, but the most common is to simply take the total value of a contract, minus any one-time setup fees and divide it by the number of years in the contract.
The formula for calculating Annual contract value (ACV) is:
Total Contract Value (excluding one time setup fees) / Total Contract Length (In Years) = Annual Contract Value (ACV)
There are a few things to keep in mind when calculating ACV. First, it's important to only include the value of recurring revenue in the calculation. This means that one-time fees, such as setup fees or installation fees, should not be included. Second, it's important to use the contract term in years, rather than months, as this will provide a more accurate representation of the value of the contract.
Example:
If a customer has a contract with you lasting 4-years with a value of $40,000, then the ACV is $10,000.
$40,000 (Contract Value) / 4 ( Contract length) = $10,000 (ACV)
Why is Annual contract value (ACV) important to measure?
ACV is important because it provides a clear and concise way to measure the value of a customer contract. This metric can be used to track the health of a business and to make decisions about where to allocate resources.
Frequently asked questions
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- What is the difference between ACV and ARR?
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ACV and ARR both measure annualised contract values but there are some key differences between them. ACV typically focuses on a single account contract whilst ARR measures the sum of revenue generated from multiple contracts at the same time.
Here’s a simple example:
- Customer 1 is on a $400 annual subscription contract, making their ACV $400
- Customer 2 is on a $1000 annual subscription contract, making their ACV $1,000
- Customer 3 is on a $600 annual subscription contract, making their ACV $600
Their ARR is the sum of their individual ACV’s. In this case the ARR is $2,000.
- What does ACV mean in SaaS?
- ACV is the annual contract value (excluding one of fees) for each contract. For SaaS businesses ACV is a useful metric in determining how many customers you need to be able to reach your revenue goals. If you have a low ACV then you will need more customers to be able to generate higher levels of revenue, whilst for companies with a larger ACV they will need less.
- What is a good ACV?
- There is no one-size-fits-all answer to this question, as the answer will vary depending on the industry and business model. However, a good starting point is to aim for an ACV that is at least double the customer's monthly recurring fee.
Related terms
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