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What is Annual Contract Value and why is it so vital? Is it any different from the Annual Recurring Value? Dive into the blog and get more insights on this.
When it comes to measuring the efficacy of your marketing and sales teams, Account Contract Value (ACV) is an unmissable metric that aids in assessing this. However, most of the managers take a backseat from exploring it to its fullest potential. Now, it could be because they are unsure of calculating it in the most accurate way or because they simply don’t know how to derive value out of it. Here in this blog, we will cover everything you need to know about Annual Contract Value in detail.
Annual Contract Value calculates the total revenue a client generates for your company, annually. Or, in simpler terms, it refers to the average annual revenue per customer contract. It is a vital SaaS metric that is used to sell solutions that have a multi-year or annual subscription plan. We will delve into it more in the next section to follow.
For calculating ACV, the formula used is given by:
Let me put an example here. Say, a customer signs up for a 2-year contract for $20,000, then your Annual Contract Value will be $20,000/2, i.e. $10,000.
Also, note that ACV is sometimes calculated differently from industry to industry. On one side a company might want to include set-up costs and insurance costs, others might wish to take a backseat on that. Whatever may be the nature of your business, make sure that you stick to a standard method of calculating ACV so that you can easily compare the metrics without any hassle.
It is always your ACV that lets you apprehend how many clients you should get to reach your next sales target. For describing a perfect sales program, you need to know about the size of an average deal, and second, you must figure out how long the sales cycle is going to be. If you can know that, you can seamlessly build a $100M SaaS business. Look at this example here given by Christoph Janz’s that he calls the ‘5 Ways to reach 100 million’:
Source: Christoph Janz
Now, you might be wondering, doesn’t ACV look a lot similar to ARR? Even though they might sound and look alike, they actually have a ton of difference and are two separate SaaS metrics. Still confused? Here, are some of its major differences between the two terms to bring out a clear-cut picture.
Often, in the Sales world, people get confused between these two terms. Annual Contract Value and Annual Recurring Revenue are seen to be more like cousins, their values mirror one another and they both have similar definitions too. That is why they get interchanged sometimes. But now, let’s get the differences straightened.
While dealing and getting acquainted with ACV might seem challenging at first, but once you have a hand around the basics, it is simply a cakewalk. To begin with, do not be intimidated by this term. The better you acclimate yourself to ACV, the easier it becomes to set a solid basis for you to compare different clients.12
Also, to analyze the effectiveness of your Marketing and Sales programs, you can use this to know whether or not the performance is being good, bad, or ugly. This will also help you to compare your ACV with other key metrics such as CAC, as well. Long story short, measuring ACV is actually the foundation of any high-performing sales team. It has a lot of latent potentials to derive value from.
An implementation engineer with six years of experience is a seasoned professional specialising in implementing and integrating complex systems and technologies for businesses. Possessing a diverse skill set that combines technical expertise, and project management capabilities.
Published March 26, 2021, Updated June 07, 2023
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