Annual contract value (ACV) seems at first glance to be nearly identical to annual recurring revenue (ARR), as both are used by SaaS business owners to get a better grasp of organizational health. However, there’s an important distinction in how it’s calculated, why it’s important, and when to use it for your business.
Let’s review all these details below.
What is annual contract value (ACV)?
Annual contract value (ACV) is the average annual revenue generated from every customer contract, not including fees.
SaaS companies calculate and track ACV similar to how they track ARR or CAC – in the case of annual contract value, it is not tied to any specific timeline or date, and can span multiple years (i.e. a four-year contract with annual payments). It’s a helpful metric to incorporate and compare with ARR and CAC, as it offers more clarity on when a SaaS company can expect to see profits from a particular contract or customer.
How to calculate annual contract value with examples
Here’s an annual contract value example: if a customer signs a four-year contract for $40,000, averaging this value per year gives an annual contract value of $10,000.
You might come across several ways to calculate annual contract value. Here’s the equation we prefer:
Annual contract value = (Contract revenue – contract fees) / number of customers
Note: Make sure you are adding up all total revenue and fees across contracts if you want to get a full, average picture of ACV.
To measure your company’s annual contract value, you’ll need the following data:
- Total revenue from contracts: this is the total amount of money your customers have paid you for contracts signed in a given period.
- Total fees from contracts: this number includes one-time fees associated with a contract (such as installation or setup fees), as well as any monthly fees that are not recurring revenue.
- Total number of customers: this is the number of customers who have signed a contract in a given period.
How to use annual contract value as a metric
After calculating your annual contract value, how can you use this metric to support business’ growth?
Think of ACV as a supporting metric for other Customer Success and Sales metrics – it will provide insight into what you’re already tracking regarding new sales, product offerings, customer churn and customer lifetime value (CLV).
Here are some practical examples on using this metric to predict, adjust and support business goals.
1. Measure customer lifetime value (CLV)
Customer lifetime value (CLV) is the total revenue a customer generates for your company throughout their entire relationship with your business. While there are a few different ways to measure customer lifetime value, annual contract value is often a key part of the calculation.
2. Measure customer churn
Customer churn is one of the biggest threats to any business. Annual contract value is helpful when measuring churn as it provides a snapshot of how much revenue each customer contributes on average.
3. ACV as a benchmark for sales proposals
When you’re pitching new deals, it’s helpful to have a benchmark for comparison. Annual contract value can help you gauge whether a potential deal is worth pursuing.
4. Compare product offerings
Use annual contract value to determine what products are more or less popular with customers. This information can help you make strategic decisions about future product development.
These are just a few reasons why annual contract value is a SaaS metric worth tracking and understanding.
What is a typical annual contract value for SaaS?
When it comes to SaaS companies, there is no “one size fits all” answer for what a typical annual contract value looks like.
This is because many different factors can impact annual contract value, including company size, industry, and pricing model.
That said, based on findings from the 2023 Customer Success Leadership Study, which surveyed more than 1,200 CS leaders, the average ACV of a SaaS company is between $25,000 to $99,999. Keep in mind that this is just a range: your company’s annual contract value could be higher or lower depending on the aforementioned factors.
For more detail on ACV for SaaS companies, download the fully study, which also examines the relation between a company’s ACV and the Customer Success team’s authority to veto bad-fit customers.
Additional resources on annual contract value
- Webinar: Finance & Customer Success: Come together to chart a clear path to profitability
- Blog: A look at customer retention benchmarks for SaaS in 2023
- Blog: 20 quick insights on Customer Success and SaaS metrics with Dave Kellogg, Dave Kellogg Consulting
- Blog: Key SaaS and Customer Success metrics you should care about with You Mon Tsang, CEO and co-founder, ChurnZero and Dave Kellogg, Dave Kellogg Consulting