What is Annual Contract Value (ACV)?
ACV is a metric used to determine the average annual value of each of your customers. SaaS businesses with recurring revenue commonly use the metric for predicting growth.
It’s helpful to calculate ACV if you have customers with multi-year contracts or those who make various payments throughout the year. ACV helps you understand how much, on average, that customer is worth to your business.
Why measure ACV?
Calculating your annual contract value for each customer lets you get a clear overview of your income and predict your ARR (annual recurring revenue). A grasp on this metric helps you see which customers bring in the most income. It also allows you to make accurate forecasts and personalized growth plans for individual customers.
When you know which customers are the most valuable, you can prioritize them and offer them more personalized service. You want to provide your top clients exceptional service to maintain their custom and ensure contract renewal.
When you know the ACV for each customer, you can work on upselling, cross-selling, exclusive discounts, or special projects for your biggest customers. If you want consistent growth, one way to do it is by developing strategies that encourage existing clients to increase their contract value.
Knowing the customers who bring in the most income to your business can also help you assess the performance of your salespeople. The salespeople who bring in the biggest clients are the ones you want to invest in and keep on your team. Awareness of this data can help you determine your ROI and establish whether you need to invest more in training for team members.
Related: Everything you need to know about Average Revenue Per User (ARPU) and Expansion Revenue.
How to calculate ACV
The calculation for ACV isn’t complex. You take the value of the customer’s total contract and divide it by the number of years they signed up for.
For example, you have a customer with a 3-year contract for $18,000. So, their ACV would be:
$18,000/3 = $6,000
It may not always be this simple as clients’ contracts can vary from year to year.
If you don’t work on multi-year contracts, you can still calculate ACV by adding up the value of all your customer’s payments over 1 year.
When calculating your ACV, you can take into account:
- One time payments
- Different contract types such as monthly or quarterly subscriptions
- Add-ons and small payments
Add up everything your customer has spent with you over the course of a year to determine their ACV. To ensure accurate calculation, include the same data for each customer.
What’s the difference between ACV and ARR?
ACV only refers to the value of one customer’s contract. ARR measures the annual, predictable recurring revenue for the whole business.
Related: Everything you need to know about Monthly Recurring Revenue (MRR)
Using both metrics together, you can better predict your future income and create realistic expectations for growth. When you grasp these figures, you can use them to improve your sales funnel, analyze your growth and work on your customer retention strategies.