Customer Success | 6 MIN READ

Annual Contract Value (ACV): Everything You Need to Know

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.

Simran Mohanty
Mar 26, 2021

Annual-Contract-Value

Annual Contract Value (ACV)

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.

Table of Contents 

  • What is Annual Contract Value?
  • How to calculate ACV?
  • ACV vs. ARR
  • How to increase ACV?

What is Annual Contract Value? 

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.

How to calculate ACV?

For calculating ACV, the formula used is given by:

ACV Formula

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.

ACV vs. ARR

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.

  • So, ACV is basically the average amount of money that is produced from subscription-based activities for a given year. But, ARR is the total value obtained from the recurring revenue of a company’s subscriptions for one calendar year. In simpler words, it is the yearly income generated from a single subscription.
  • Additionally, ARR is more like a standard metric that is checked by a business at one point in time. But on the contradiction, ACV is a revenue metric that spreads across a couple of years.
  • The calculation of ACV is mostly needed for subscription-based businesses. This includes B2BB2C, and SaaS tech organizations as well. ARR on the other hand is not industry-specific and is used by many.  

How to increase ACV?

  • Zero in on cross-selling and upselling: As and when your customer base grows, so will their needs. That is when deploying a critical sales technique like upselling will turn out to work in your favor. Also, if done right you can actually let a customer buy a more expensive service. There’s no big math in processing big money = big value.

    However, like I said this is a critical yet delicate step. Of course, you want to double up your sales and make more profit, but would you do that at the cost of a customer? Think again. Your primary motive is to serve the customer right. On that note, when you pressure a customer to make a purchasing decision when they are not even ready to commit, they might just churn away then and there.
  • Place above average competitive prices: Again, this too shouldn’t be too head-hitting to get. When you raise your prices, you will see an increased ACV. And, you already know how more money means more value.

    See that this too is a tricky step, so you need to know what you are doing here. The second you raise your prices, your customers will find n+1 reason to churn away. Not giving them enough notice or triggering them to sign into a contract without any prior nudges will most likely result in an alarming churn rate, which you would not want for your business. Simply put, treat your customers the same way as you wish to be treated as a buyer.

That’s a Wrap

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.

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.

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Originally Published March 26th, 2021, Updated March 26th, 2021

Simran Mohanty

Simran hails from the content marketing backdrop with extensive knowledge in blogs, articles, and technical whitepapers in the non-fictional domain. She uses her 'gift of the gab' to explore new possibilities on her way and to make an exquisite impact on her readers. In her spare time, she likes to read journals on artificial intelligence or play with her cute kittens.

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