Date created: Oct 12, 2022 • Last updated: Oct 12, 2022
What is Weighted ACV?
Weighted Annual Contract Value (WACV) calculates the average contract dollar value with a weighted average proportional to the value of the contract. Essentially, higher value contracts are assigned more importance when calculating the total average contract value of a business. This approach is helpful to companies that have widely varying customer concentration by accurately calculating an ACV that is not skewed by contracts with low dollar value.
Weighted ACV Formula
How to calculate Weighted ACV
Say you have three customers. Customer 1 has a contract value of $40,000 while the other two customers have a contract value of $5000 each. Adding up these numbers (40k + 5k + 5k), you get a total contract value of $50,000. You weighted ACV is calculated as follows: ($40,000 * ($40,000 / $50,000)) + ($5,000 * ($5,000 / $50,000)) + ($5,000 * ($5,000 / $50,000)). This gives you a WACV of $33,000. This is much more nuanced than the ~$17,000 you would get with the typical ACV metric.
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How to visualize Weighted ACV?
Represent your WACV as a summary chart to display the current value of your weight average contract size. You can opt to compare your WACV with a previous time period, such as year-over-year comparison, to measure how this number has shifted. In general, you want your WACV to increase, although it’s important to keep other factors in mind such as customer concentration, customer base size, high-risk customer profile, and churn.
Weighted ACV visualization example
ChartMeasuring Weighted ACV
More about Weighted ACV
Weighted Annual Contract Value (WACV) is a modified version of Annual Contract Value (ACV) that assigns weightage to the size of a contract when calculating the average value. For example, if 80% of your revenue is from a single customer, WACV will weigh the contract value of that customer at 80% when calculating the average. This results in WACV being much closer to the value of the largest contracts.
WACV is extremely helpful to companies who have customers of varying sizes, a concept measured by the Customer Concentration metric. While ACV would give equal importance to customers of all sizes, WACV prioritizes your highest revenue customer contracts. The key benefit of measuring your ACV this way is that you get a realistic dollar value of your customer profile, rather than diluting your ACV with tons of low deal value customers. Companies often do this anyway, by filtering out contracts below an arbitrary threshold. With WACV, the arbitrary threshold is replaced by actual weightage based on how much a customer contributes to your total revenue.
WACV can also be used to identify your “very important customers” by dividing your total contract value by WACV. For example, say your total contract value is $500,000 and your WACV is $250,000. If you divide your total contract value by WACV, you get two - which indicates that the majority of your revenue is coming from approximately two customers. When you scale this up to a large customer base, you can use this metric to efficiently identify where the bulk of your revenue is coming from. You can then apply this information to go after similar customer profiles and also to develop long-term relationships with these customers.
None of this is to say that you should neglect any part of your customer base. Nnamdi Iregbulem, who coined this metric, recommends that you measure WACV and ACV together, in order to keep track of your entire customer base. Use WACV as a tool to conduct segmented analysis of your existing customers and your acquisition strategy to capture best-fit as well as high ROI customers.
Weighted ACV Frequently Asked Questions
What is the difference between ACV and WACV?
Annual Contract Value (ACV) measures your annualized average contract value by taking the average of all customer contacts, while Weighted Annual Contract Value measures your annualized average contract value by weighing all customer contracts proportional to their contract size.
Is it better to have a low or high customer concentration?
Generally, it is better to have a low customer concentration because this lowers the risk of damaging impact to your business if a high-paying customer churns. However, some businesses value high customer concentration because it is easier to focus on maintaining the relationship with a few key customers that bring in high revenue.