Annual Contract Value (ACV)


Annual Contract Value (ACV) refers to the total revenue a company expects to generate from a particular customer's contract over one year.


In order to calculate the ACV, a company must first determine the contract's total value, which includes all fees and charges associated with the products or services being provided. From there, the company must then estimate how much revenue it will generate from the contract annually.


ACV is an essential metric for companies that offer subscription-based products or services, as it provides insight into the revenue stream that can be expected from a particular customer over time. By analyzing ACV, companies can make informed decisions about pricing strategies, marketing efforts, and customer retention initiatives.


For example, a software-as-a-service (SaaS) company might use ACV to determine the pricing for its subscription plans. By analyzing the ACV of its existing customers, the company can identify which pricing plans are most successful at generating recurring revenue and adjust its pricing strategy accordingly.


Overall, Annual Contract Value is a crucial metric for any company that relies on recurring revenue from customers and can provide valuable insights into a business's health and growth potential.


How to Calculate Annual Contract Value (ACV)?


Calculating Annual Contract Value (ACV) is an important task for businesses that offer subscription-based services or products. ACV represents the annual revenue generated from a customer's subscription contract. Here's a step-by-step guide on how to calculate ACV:


  1. Determine the Contract Value: Start by calculating the total contract value for the subscription term. This is the total amount a customer is expected to pay for the entire subscription duration. For instance, if a customer signs up for a two-year subscription at $1,000 yearly, the total contract value would be $2,000.
  2. Divide the Contract Value by the Number of Years: Divide the contract value by the number of years in the subscription term to determine the Annual Contract Value. In our example, the ACV would be $1,000 ($2,000 total contract value divided by two years).
  3. Adjust for Changes in Contract Value: If the contract value changes over the subscription term, you'll need to adjust the ACV accordingly. For instance, if the customer in our example renewed their subscription after the first year at a reduced rate of $800 per year, the ACV for the second year would be $800.
  4. Account for Renewals and Cancellations: If a customer cancels their subscription before the end of the term, the ACV will need to be adjusted to reflect the revenue generated. Likewise, the ACV must be recalculated if a customer renews their subscription at a different rate or for an additional term.

Following these steps, you can accurately calculate the Annual Contract Value for your subscription-based business. Understanding ACV is critical for forecasting revenue, evaluating customer lifetime value, and making informed business decisions.


Comparison between ACV and ARR


ACV (Annual Contract Value)ARR (Annual Recurring Revenue)
ACV is the value of a contract that a customer agrees to pay over the course of a year.ARR is the annual revenue generated by a customer's subscription or recurring services.
ACV takes into account one-time fees and variable costs, such as implementation or setup costs, which are not included in ARR.ARR only considers the recurring revenue that a customer pays on a regular basis and does not include one-time fees or variable costs.
ACV is commonly used to calculate the sales pipeline and forecast revenue for the upcoming year.ARR is a more accurate and stable metric for measuring a company's revenue, as it reflects the ongoing business relationship with customers.
ACV can be higher than ARR, as it includes additional revenue beyond the recurring revenue stream.ARR is typically lower than ACV, as it only includes the recurring revenue stream and does not include one-time fees or variable costs.
ACV is useful for measuring the potential revenue a customer can bring in over the course of a year.ARR is useful for measuring the ongoing revenue a company can expect from its existing customer base.


In summary, while both ACV and ARR are essential metrics for measuring a company's revenue and forecasting future growth, they differ in their focus and the type of revenue they include. ACV considers all revenue streams from a customer, while ARR only considers the recurring revenue stream. Therefore, companies should use both metrics to get a more comprehensive understanding of their revenue and business performance.