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.
What is the difference between ACV and ARR?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 $600Their 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.
