Definition
Annual Contract Value, often called ACV, is a metric used by subscription-based and service-driven businesses to measure the yearly value of a customer contract. It simplifies revenue forecasting by standardising contract values on an annual basis, regardless of whether the customer pays monthly, quarterly, or multi-year.
For example, if a client signs a three-year contract worth 90,000 dollars, the ACV is calculated as 30,000 dollars per year.
Advanced
ACV provides businesses with a consistent way to compare customer contracts, evaluate account growth, and assess sales performance. It is often paired with metrics like Total Contract Value (TCV), Monthly Recurring Revenue (MRR), and Customer Lifetime Value (CLV).
Advanced use of ACV includes segmenting accounts by revenue tier, analysing expansion and upsell opportunities, and linking ACV to customer acquisition costs. Finance and sales teams use ACV in forecasting models to track sustainable growth, measure renewal performance, and guide resource allocation across sales teams.
Why it matters
- Simplifies revenue forecasting across multiple contract lengths.
- Helps compare customer value consistently.
- Supports sales performance tracking and compensation planning.
- Highlights upsell and expansion opportunities within accounts.
Use cases
- Calculating the annual value of a multi-year SaaS contract.
- Tracking average ACV across different customer segments.
- Forecasting annual recurring revenue for budgeting.
- Comparing account performance between sales representatives.
Metrics
- Average ACV per customer.
- Growth in ACV from upsells and renewals.
- ACV distribution across small, mid, and enterprise clients.
- Correlation of ACV with acquisition cost and churn.
Issues
- Does not account for contract variability within a year.
- May overemphasise large contracts and distort averages.
- Does not reflect customer lifetime value directly.
- Can be misleading if discounts or incentives skew contract terms.
Example
A SaaS provider signs three clients with contracts worth 12,000 dollars, 24,000 dollars, and 60,000 dollars per year. The average ACV across these accounts is 32,000 dollars, helping the business understand the scale of new customer revenue.