Average Contract Value (ACV)

Annual contract value (ACV) is a method of calculating the annual value of a multi-year contract in SaaS.

What is Average Contract Value (ACV) in SaaS?

Annual contract value (ACV) is a method of calculating the annual value of a multi-year contract.

Since recurring revenue is the lifeblood of SaaS companies, it is critical to know how annually valuable a contract will be for the bsiness.

ACV usually goes alongside total contract value (TCV) as a metric.

Both are important ways to assess a customer’s value to the business, but since revenue and financial statements are calculated on an annual basis, it is valuable to have the value of a multi-year contract annualized for financial forecasting purposes.

This is especially important for accurate comparison of contract value for customers with different contract lengths, as shown in the example below:

A customer with a 10-year contract may appear to be more valuable than one with a 12-month contract.

Although this seems to be the case, over the course of a single year, the customer with the shorter contract may contribute more value to the company.

How to calculate ACV

Annual Contract Value (ACV) is calculated by multiplying the average monthly recurring revenue (MRR) by 12:

ACV = Total contract value ÷ Number of years

To calculate the average MRR, you need to add up all of the revenue generated by a customer’s subscription over the course of a month, including any upsells or add-ons, and then divide that number by the number of months in the subscription period.

Once you have the average MRR, you can simply multiply it by 12 to get the ACV.

ACV calculation example

Let’s say that a software company sells a subscription-based product for $100 per month, and a customer signs up for a 12-month subscription.

The customer also decides to add an extra feature to their subscription for an additional $20 per month.

To calculate the ACV, you would first need to calculate the average MRR for this customer.

The revenue generated per month for the customer’s subscription would be $100 (base subscription) + $20 (additional feature) = $120.

To calculate the average MRR, you would divide the total revenue generated by the number of months in the subscription period:

$120 / 12 = $10

So the average MRR for this customer is $10.

To calculate the ACV, you would then simply multiply the average MRR by 12:

$10 x 12 = $120

Therefore, the Annual Contract Value for this customer would be $120.

ACV vs ARR

Annual Contract Value (ACV) and Monthly Recurring Revenue (MRR) are both important metrics for subscription-based businesses, but they represent slightly different aspects of a company’s revenue.

MRR is the amount of revenue that a business generates on a monthly basis from all of its active subscription customers. It takes into account the base subscription fee, as well as any add-ons or upsells that customers have purchased.

ACV, on the other hand, represents the total annual revenue that a business will receive from a particular customer’s subscription. It is calculated by multiplying the average MRR by 12.

In other words, MRR represents the monthly cash flow that a business can expect from its active customers, while ACV represents the annual revenue that the business can expect to receive from a particular customer’s subscription.

ACV is useful for forecasting revenue and predicting future cash flow, as it gives businesses a more accurate picture of how much revenue they can expect to receive from a customer over the course of a year. MRR, on the other hand, is useful for tracking the ongoing revenue stream from all active subscriptions on a monthly basis.

ACV vs TCV (Total contract value)

Annual Contract Value (ACV) and Total Contract Value (TCV) are both metrics used to measure the revenue generated by a subscription-based business, but they represent slightly different things.

ACV represents the total annual revenue that a business can expect to receive from a particular customer’s subscription. It is calculated by multiplying the average monthly recurring revenue (MRR) by 12. ACV is useful for forecasting revenue and predicting future cash flow.

TCV, on the other hand, represents the total value of a customer’s contract over its entire duration, including any one-time fees or charges. TCV takes into account the full value of a contract, while ACV only considers the recurring revenue generated by the contract on an annual basis.

For example, if a customer signs a 2-year contract for $1,000 per year, the TCV would be $2,000. However, the ACV would depend on the payment schedule. If the customer pays $1,000 at the beginning of each year, the ACV would be $1,000. If the customer pays $500 at the beginning of each year and $500 halfway through each year, the ACV would be $750 ($500 for the first 6 months, and $1,000 for the next 6 months).

In summary, while ACV represents the annual recurring revenue g

What is a good ACV for SaaS?

SaaS companies vary so greatly in their pricing that it is not possible to get an industry-wide average for annual contract value.

Some SaaS companies that cater to high-level enterprise clients may have an ACV of $100,000 or more, while others that serve smaller or mid-size businesses may have an average annual contract value of only a few thousand dollars.

SaaS companies that market B2C often only have an ACV of a few hundred dollars (or less).

Rather than looking at ACV as a standalone success metric, it is more useful to look at ACV alongside other metrics, like CAC (customer acquisition cost). If you have a relatively low CAC compared to your ACV, you are in a better place to succeed and maintain client profitability than if you have a high CAC and lower contract value.

On the other hand, a low ACV can also be a sign that you can easily attract paying customers. Having a product that is so good that people are willing to pay money to give it a try can be a huge boost to new SaaS companies, even if the initial paid package is only a few dollars above a free trial.

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