What is Annual Contract Value (ACV)?
Annual Contract Value (ACV) is a key SaaS metric representing the average revenue earned per customer contract per year. It breaks down the total contract revenue into an annualized figure, allowing subscription-based and SaaS businesses to understand their average yearly earnings from each contract. This insight is critical for setting pricing strategies, assessing contract profitability, and benchmarking revenue growth.
For example, if a client signs a 3-year contract worth $150,000, the ACV would be $50,000 per year. Importantly, ACV usually excludes any one-time setup fees, focusing on the recurring portion of the revenue.
Annual Contract Value (ACV) vs. Annual Recurring Revenue (ARR): Key Differences
While both Annual Contract Value (ACV) and Annual Recurring Revenue (ARR) are vital metrics for SaaS and subscription-based businesses, they serve different purposes and provide unique insights into revenue. Here’s how ACV and ARR compare:
<table>
<tr>
<th>Metric</th>
<th>Annual Contract Value (ACV)</th>
<th>Annual Recurring Revenue (ARR)</th>
</tr>
<tr>
<td>Definition</td>
<td>The average revenue per year per customer contract.</td>
<td>The total recurring revenue from all active customer contracts on an annual basis.</td>
</tr>
<tr>
<td>Purpose</td>
<td>Normalizes revenue from each contract yearly, ideal for evaluating the annual worth of multi-year contracts.</td>
<td>Tracks overall recurring revenue growth and helps forecast future revenue trends.</td>
</tr>
<tr>
<td>Calculation</td>
<td>Total contract value divided by total years in the contract.</td>
<td>Sum of all recurring revenue generated annually from active contracts.</td>
</tr>
<tr>
<td>Usage</td>
<td>Used to assess the annualized revenue value of individual contracts for comparison, pricing, and upsell opportunities.</td>
<td>Used to monitor company-wide revenue performance, including tracking growth, customer retention, and forecasting.</td>
</tr>
<tr>
<td>Contract Level Insight</td>
<td>Offers insight into individual contract values, enabling per-year comparisons across contracts of different lengths.</td>
<td>Aggregates revenue from all active contracts, providing a comprehensive view of company revenue health over time.</td>
</tr>
<tr>
<td>Ideal For</td>
<td>Evaluating sales performance, setting pricing, understanding customer value on an annual basis.</td>
<td>Projecting growth, assessing churn impact, setting financial targets, and communicating revenue benchmarks to stakeholders.</td>
</tr>
<tr>
<td>Best Use Case</td>
<td>SaaS businesses with variable contract lengths, as it provides a normalized view of contract value year-over-year.</td>
<td>Businesses needing a snapshot of total recurring revenue to understand their monthly or yearly financial performance.</td>
</tr>
</table>
In summary, ACV allows for a per-contract, annualized view—especially useful for contracts of various lengths—while ARR provides a holistic look at the company's recurring revenue, ideal for assessing overall growth and financial planning. Both are critical to understanding a SaaS business's revenue landscape and informing strategic decisions.