What is Annual Contract Value (ACV)?

Annual contract value (ACV) is an average annual contract value of subscription revenue from each contracted customer. It excludes any one-time fees. For Ex: A customer has signed a 4-year deal with you for $40,000, normalizing this to a single year ACV will be $10,000.

Annual Contract Value (ACV) Formula:

ACV = Total Contract Value (excluding one-time payment) / Total years in contract.

Difference between ACV and ARR?

Here is an example to clear the confusion between ACV and ARR:

Customer A: Customer A agrees to a 3-year agreement, worth $60,000 and plans to pay on a yearly basis.

ACV = $60,000/3 = $20,000

ARR = $60,000/3 = $20,000

Customer B: Customer B agrees to a 6-month agreement, worth $5,000 and plans to pay on a monthly basis.

ACV = $5,000/1 = $5,000 (normalised to annual value: must be minimum 1 year)

ARR = $10,000/1 = $10,000 (assuming Customer B renew subscription after 6 months)

Combining ACV for both customers:

Calculating ARR = $20,000 (from Customer A) + $10,000 (from Customer B)
= $30,000

Calculating ACV (year 1):
[$20,000 (from Customer A) + $5,000 (from Customer B)] / 2 (number of customers)
= $12,500

Calculating ACV (year 2 & 3):
[$20,000 (from Customer A) + $0 (from Customer B)] / 1 (number of customers)
= $20,000

Importance of ACV?

By itself, the annual contract value isn’t a super-useful metric. But, by understanding your strategy for ACV, and by comparing it to other SaaS metrics, you can pull out some valuable insights to help guide your business decisions.