If you run a SaaS company, you know the importance of tracking your metrics for your business’ success.
So, you probably keep an eye on your company’s ARR, CAC, revenue run rate, and other SaaS metrics.
And yet, chances are you find measuring your company’s Annual Contract Value (ACV) a bit confusing.
You’re not alone – with so many different ACV definitions and formulas out there, one universally-agreed approach towards tracking this metric doesn’t exist yet, so some companies decide to skip it altogether.
However, ACV is a valuable metric for determining your business’ health – and we’re here to clear up the confusion around it!
In this article, we will cover everything you need to know about ACV, including:
- What is Annual Contract Value (ACV)?
- How to Calculate Annual Contract Value (ACV)?
- Why ACV Is an Important SaaS Metric
- What’s the Difference Between ACV and ARR?
- What’s the Difference Between ACV and TCV?
- 12 Examples of Total Contract Value of Real Companies
What is Annual Contract Value (ACV)?
Essentially, Annual Contract Value (ACV) refers to the average recurring revenue your company generates annually per one customer’s subscription contract.
Simply put, if a customer signs a 1-year subscription contract for $10,000, the annual contract value is $10,000.
But, for example, if a customer signs a 2-year subscription contract for $18,000, the annual contract value averaged will be $9,000.
One thing to keep in mind is that the ACV calculates recurring revenue, so any one-time fees are excluded from the calculation.
How to Calculate Annual Contract Value (ACV)?
Now, although there’s a lot of confusion surrounding ACV, it’s actually not that difficult to calculate.
In fact, the formula is relatively simple:
Annual Contract Value (ACV) = Total revenue from subscription contracts / total years in contract
Moreover, ACV can be calculated for both long-term and short-term customers, so let’s see how to go about calculating ACV in each case.
#1. ACV for a Long-Term Customer
Let’s say our example long-term customer has signed a 5-year contract for $75,000 with your company.
Here’s how you’d calculate this customer’s ACV:
- Total revenue from subscription contracts $75,000
- Total years in contract 5
- Annual Contract Value (ACV) = $75,000 / 5 = $15,000
Keep in mind that the customer’s ACV wouldn’t change if he had to pay any one-time fees (e.g. a $50 sign-up fee) since ACV only calculates your revenue generated from subscriptions.
If you calculated the Annual Recurring Revenue (ARR) in this case, by the way, you’d notice that both ACV and ARR are the same (we’ll later use this information to calculate combined ACV between long-term and short-term customers).
#2. ACV for a Short-Term Customer
Now, let’s say our example short-term customer signed a 2-month contract for $1,000 with your company.
This is how you’d calculate this customer’s ACV:
- Total revenue from subscription contracts $1,000
- Total years in contract 1
- Annual Contract Value (ACV) = $1,000 / 1 = $1,000
As you can see, we still calculate one year’s worth when measuring ACV for short-term contracts.
That’s because, as the ‘annual’ in Annual Contract Value suggests, ACV considers how much revenue you’re generating from a customer over 1 year instead of over the length of their contract.
Now, if this example customer decided to extend their contract with your company after 2 months to a full year, their ARR would amount to $6,000 ($1,000 / 2 months = $500 per month, $500 x 12 months = $6,000).
#3. Combining ACV for Both Short and Long-Term Customers
Chances are your company has both short-term and long-term customers – so how would you calculate ACV in this case?
Well, it’s nothing too complicated!
Again, let’s work with our long-term customer with a 5-year contract from the example above and our short-term customer with a 2-month contract for this calculation.
First, to see the difference between calculating ACV and ARR, let’s calculate ARR:
- Long-term customer ARR $15,000
- Short-term customer ARR $6,000
- Annual Recurring Revenue (ARR) = $15,000 + $6,000 = $21,000
And now, let’s see how we’d calculate their combined ACV:
Year 1 ACV:
- Long-term customer ACV $15,000
- Short-term customer ACV $1,000
- Number of customers 2
- Annual Contract Value (ACV) = ($15,000 + $1,000) / 2 customers = $8,000
Years 2-5 ACV:
- Long-term customer ACV $15,000
- Short-term customer ACV $0
- Number of customers 1
- Annual Contract Value (ACV) = ($15,000 + $0 ) / 1 customer = $15,000
As you can now tell, ACV helps you to see the average contract value across multiple customers.
Why ACV Is an Important SaaS Metric
Tracking your ACV can help your SaaS company to develop and optimize your business, pricing, and marketing strategies to boost your business’ growth.
Like any SaaS metric, though, ACV works best in combination with other metrics.
Used alongside other SaaS metrics, such as churn rate and Customer Acquisition Cost (CAC), ACV can be a valuable metric that helps you make strategic business decisions.
Something to keep in mind, though, is that your company’s success doesn’t necessarily correlate with a high or low ACV.
B2C companies with millions of customers, for example, can have a very low ACV and still be extremely successful.
On the other hand, B2B companies typically have a higher ACV. Their CAC, though, is high as well, which means they don’t have many customers.
Different ACVs make sense for different companies, so just make sure to compare your ACV with other SaaS metrics to get an accurate picture of your business’ health.
What’s the Difference Between ACV and ARR?
Both ARR and ACV are annualized metrics, so it’s easy to get them confused.
However, the main difference between these metrics is that Annual Recurring Revenue (ARR) calculates the recurring revenue generated from all of your subscription accounts, whereas Annual Contract Value (ACV) calculates the average revenue of one subscription account.
What’s the Difference Between ACV and TCV?
The difference between Annual Contract Value (ACV) and Total Contract Value (TCV) is that TCV calculates the total revenue generated across the entire contract, including all one-time fees.
If a customer, for example, signs a 2-year contract for $20,000 with a sign-up fee of $100, their ACV will be $10,000 (measured per year), whereas their TCV, measured across the 2 years of the contract, will be $20,100.
If this sounds a bit confusing, here are the situations in which you’ll benefit from measuring TCV over ACV:
- When you want to calculate discount rates for long-term customers
- When you want to find your most valuable customers over the whole contract term
On the flip side, you’ll benefit from measuring your company’s ACV over TCV whenever you want to find out which customers are consistently bringing the most value to your company.
12 Examples of Total Contract Value of Real Companies
There are many ways to reach your first $1m, $10m, and $100m in SaaS revenue but you have to pay attention to many SaaS metrics.
Let’s take a look at 4 very different price points and real-life examples.
Total Contract Value (TCV) of $5-$100 Per Year:
The Freemium model works well here. Give your product away for free to keep your top of the funnel really wide. Identify what point in the onboarding your users get max value and put your paywall there.
If you pick the right spot for your paywall, you should see a 5%-15% conversion rate from free to paid.
Examples:
- Quizlet: 1m customers that pay $15/year.
- Tsheets: Sold for $350m+ to intuit after getting 800,000 customers to pay $50/yr on average.
- VideoBlocks: $20m in revenue (ARR) from 150,000 customers that pay $110/yr on average.
Total Contract Value (TCV) of $100-$1000 Per Year:
Low touch models work well here. Try webinars at scale with partners. Pay the partner 30%-50% of first-year revenue from all customers they drive. Those partners will fill your webinars, while your product sells and your revenue grows.
Examples:
- Typeform is a b2b SaaS company with $1.4m in monthly recurring revenue ($18m in ARR). They grew by launching hundreds of integrations with partners.
- WebinarNinja hit $12m in ARR by hitting a $400 first-year ACV on most of its 13,000 customers. Gross churn is high at 48% but they still have a customer lifetime value (LTV) of over $800 and pay $0 on CAC because the “Powered by WebinarNinja” product marketing button drives most new customers.
- Dialsource has grown to $18m in ARR by using the Salesforce customer base. For many years, Salesforce was the only integration Dialsource promoted. It’s dangerous for the revenue of a business to be tied to one partner but in this case, it worked. It wouldn’t surprise me to see Salesforce acquire Dialsource sometime in the next 3 years.
Total Contract Value (TCV) of $1000-$50,000 Per Year:
At this price point, you can afford to hire a salesperson.
Do the math though – that salesperson should be focused on closing a customer contract where the annual value is north of $5,000, otherwise, there isn’t enough margin to pay the marketing expenses and salesperson commission and still make money on the customer.
Examples:
- Pandadoc has 13,000 customers and a revenue run rate of over $18m. Most of their early traction came from their salesforce integration but they’ve branched out since then and expect to add another $1m in MRR over the next 6 months.
- CloudCheckr has 600 customers that pay $2,000/mo or an annual contract value of about $24k. They do over $20m in annual revenue. The lifetime value of these customers is over $100,000 because churn is so low. ACV, customer acquisition cost (CAC), and churn are all important SaaS metrics you should be tracking.
- VenaSolutions has 500 customers that pay $50,000 per year on average. The customer acquisition cost (CAC) for these customers is $50,000, so the company makes their money back in 1 year, a 1 year payback period. Vena also makes extra money by charging one-time fees in the form of an upfront implementation cost. This drives higher retention and lifetime value over the long term and is a reason the company does over $20m in revenue today.
3 SaaS Companies With Annual Contract Value (ACV) Higher Than $50,000
At this first-year contract value, you can afford to fly sales reps to potential customers. This is called field sales.
A typical field sales rep will have a quota of $1m+ and if they sell that much, they’ll make about $100k base and another $150k in commissions.
If you’re running a SaaS business, follow this math, assuming the salesperson is closing customers with a low churn rate and high average contract values.
Examples:
- MovableInk has 500 customers that pay $80k/year on average. They have a sales team of over 10 field sales reps that go out and hunt these larger contract values. Today the company does over $40m in annual recurring revenue (ARR).
- Lucidworks has 400 customers that pay $100k/year on average. The company does over $40m in revenue by using a robust field and inside sales team approach.
- Atrium has 30 customers that pay $300k/year each. They do $11m in annual recurring revenue, showing there are many ways to hit your first $10m in revenue. You can charge a lot to very few customers or a very little amount to millions of customers.
Key Takeaways
And now you know everything about measuring your SaaS company’s Annual Contract Value (ACV)!
Hopefully, this article helped to clear up the confusion, so you know exactly how to measure your company’s ACV.
Before you do that, though, let’s go over the key points of tracking your ACV:
- Annual Contract Value (ACV) lets you see how much revenue your company generates per customer on average.
- The ACV formula is pretty simple – simply divide your total recurring revenue by the years in the contract.
- You can calculate ACV for long-term customers, short-term customers, and both combined.
- Tracking and measuring your ACV alongside other SaaS metrics can help you to improve your business strategy.
- Your ACV depends on your business strategy, so having a low ACV doesn’t necessarily mean that your business isn’t successful.