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Annual Contract Value (ACV)

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What is Annual Contract Value?

Annual Contract Value, or ACV, is the annualized value of a given customer contract. It is calculated by taking the total value of a contract and averaging it annually.

Though different businesses calculate Annual Contract Value differently, the general calculation for ACV is as follows:

Total Contract Value / Number of Years on the Contract = ACV

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What does ACV mean for SaaS Sales?

Given ACV is the metric Sales teams use to understand what the annual revenue will be for a contract, it's commonly compared to CAC, customer acquisition costs. When compared, Sales teams can use this to decide if a contract's value is profitable.

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What is the difference between ARR and ACV?

ACV and ARR both measure annualized contract values. The key distinction is that ARR measures the value across multiple accounts versus a single account. We like to use the "C" in ACV to also mean "per Customer".

  • ACV - Per customer annualized contract value.
  • ARR - Aggregate annualized contract values

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What is Annual Contract Value useful for?

  1. Sales forecasting: ACV is useful for sales forecasting. By calculating the expected ACV for each customer, sales teams can forecast their expected revenue and adjust their strategies accordingly. This can help them prioritize leads, allocate resources, and set revenue targets.
  2. Annual budgeting: ACV is also useful for annual budgeting. By aggregating the expected ACV for all customers, businesses can forecast their annual revenue and budget their expenses accordingly. This can help them plan for future investments, expansion, and growth.
  3. Quarterly or monthly reporting: ACV can also be measured on a quarterly or monthly basis to track changes in customer contracts or subscriptions. This can help businesses identify trends in customer behavior and adjust their strategies accordingly.