Annual Contract Value
What is Annual Contract Value?
Annual Contract Value is the dollar amount an average customer contract is worth to your company in one year. There tends to be less universal consensus on the definition of ACV compared to some other SaaS metrics, such as Annual Recurring Revenue. For example, some companies include one-time initial charges like setup or training in their ACV calculations, while others don’t.Alternate names: Average Customer Value
How to calculate Annual Contract Value
What is a good Annual Contract Value benchmark?
There is really no ACV benchmark, because there’s nothing necessarily good or bad about a high or low ACV. For example, companies with lower ACVs like Slack (ACV of 4.6K in 2019) can be extremely high growth.
You have 100 customers. 30 signed a 3-year contract with a contract value of $90,000, equivalent to $30,000 / year. 30 signed a 2-year contract with a contract value of $80,000, equivalent to $40,000 / year. 40 signed a 1-year contract with a contract value of $50,000, equivalent to $50,000 / year Annual Contract Value = ( (30,000 x 30) + (40,000 x 30) + (50,000 x 40) ) / 100 customers ACV = $41,000
More about this metric
Annual Contract Value is sometimes confused with Annual Recurring Revenue (ARR). While the definition and calculation of ACV can vary across SaaS companies, ARR is more consistently calculated. “It's the Revenue equivalent used by every SaaS company”, and doesn’t include things like one-time charges, that ACV can.
Annual Contract Value is most useful when it’s analyzed in context of other metrics such as revenue retention. Companies are often grouped by ACV band for such analysis.
For example, in a study of 700 B2B SaaS companies, SaaSCapital analyzed Gross Revenue Retention by ACV band. They found that companies with an ACV less than $1000 had Median Gross Retention of 89%. Companies with an ACV over $150,000 had Median Gross Retention of 95%.
Why is this? Lower ACV products are often sold to small and mid-sized businesses, whose financial stability is more precarious than larger enterprises who can afford higher ACV products. As well, switching costs are often much less for lower ACV products than they are for higher ACV products, effectively incentivizing retention for higher ACV products.
Additional Annual Contract Value recommended resourcesA good article about ACV by the folks at Lighter Capital
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