Annual Contract Value
Annual Contract Value (ACV): Definition, Formula, and Why It Matters in Sales
What Is Annual Contract Value (ACV)?
Annual Contract Value (ACV) is a sales and financial KPI that measures the average annualized revenue generated from a single customer contract. It’s commonly used in subscription-based businesses or SaaS companies to understand the value of contracts on a per-year basis.
For example, if a customer signs a 3-year contract worth $60,000, the ACV is $20,000.
ACV helps sales and finance teams track recurring revenue performance, compare deal sizes, and forecast long-term growth more accurately.
ACV vs. TCV: What’s the Difference?
| Metric | Definition | Use Case |
|---|---|---|
| ACV | Average revenue earned per year of a contract | Used to track annual recurring revenue health |
| TCV | Total value of the entire contract (one-time + recurring) | Used for total revenue recognition and planning |
Example:
- Contract: $90,000 for 3 years
- ACV = $30,000
- TCV = $90,000
How to Calculate ACV
Formula:
ACV = Total Contract Value / Number of Contract Years
If the contract is annual by default, ACV = TCV.
Example:
- TCV: $48,000 over 2 years
- ACV = $48,000 ÷ 2 = $24,000
Note: ACV typically excludes one-time fees like setup or onboarding unless they are recurring annually.
Why ACV Matters as a Sales KPI
ACV is a critical financial metric for sales and GTM teams because it reflects both deal size and customer value over time. Here’s why it’s important:
- Sales Targeting: Helps identify high-value customers and optimize sales strategies accordingly.
- Forecasting & Revenue Planning: Allows leadership to predict recurring revenue based on pipeline ACV.
- Segmentation: Useful for categorizing customers into enterprise, mid-market, or SMB based on value.
- Compensation Design: Sales reps may be compensated differently based on ACV thresholds.
ACV Benchmarks in B2B SaaS
Average ACV can vary greatly depending on business model and target customer:
| Segment | Average ACV Range |
|---|---|
| SMB SaaS | $500 – $5,000 |
| Mid-Market | $5,000 – $25,000 |
| Enterprise SaaS | $25,000 – $250,000+ |
Tracking average ACV over time also shows whether you’re successfully moving upmarket or not.
ACV vs. Other Sales KPIs
| Metric | Focus | Key Difference from ACV |
|---|---|---|
| Quota Attainment | % of goal achieved by a rep/team | ACV is input to revenue; quota is goal |
| Win Rate | Deal conversion effectiveness | ACV focuses on deal size, not quantity |
| LTV (Customer Lifetime Value) | Total value over customer lifespan | ACV is annual; LTV is full lifespan |
Challenges in Using ACV
While ACV is valuable, there are some caveats:
- Multi-Year Discounts: Long-term contracts often include annual discounts, which can skew ACV if not normalized.
- One-Time Fees: Including onboarding or training costs may overstate ACV unless they recur.
- Inconsistent Billing Terms: Monthly vs. annual contracts may require normalization for true ACV comparison.
- Expansion Revenue: ACV doesn’t always reflect upsells unless recalculated over time.
How to Improve ACV
- Move Upmarket: Target larger customers with bigger needs and budgets.
- Bundle More Value: Offer add-ons or tiered pricing to increase contract size.
- Improve Discovery: Qualify deals based on budget and potential impact during the early stages.
- Demonstrate ROI Clearly: Larger contracts are easier to justify when the value story is strong.
- Enable with Tools: Equip reps with calculators or business case builders to sell value at higher pricing tiers.
ACV Use Case Example
Scenario:
A SaaS company signs two different contracts:
- Customer A: $12,000 for 1 year → ACV = $12,000
- Customer B: $90,000 for 3 years → ACV = $30,000
By analyzing ACV, the company learns that Customer B is significantly more valuable per year and may require a dedicated account manager or priority support.
FAQs About ACV
Is ACV the same as ARR?
No. ARR is the sum of all annual contracts across customers. ACV is per contract or per customer.
Does ACV include one-time fees?
Generally no—only recurring annual revenue is included in ACV, unless stated otherwise.
Can ACV change over time?
Yes. If customers expand their usage or purchase add-ons, ACV should be recalculated.
How is ACV used in compensation?
Reps may be rewarded based on ACV tiers, especially in SaaS and enterprise sales.
Final Thoughts
ACV provides sales, finance, and GTM teams with a consistent way to measure deal value and revenue potential on a per-year basis. It helps businesses evaluate whether they’re attracting the right customers and targeting profitable, sustainable accounts. In a market where demonstrating long-term ROI is more critical than ever, increasing ACV is about selling smarter, not just selling more. ValueCore.ai makes this possible by automating ROI modeling and embedding value-driven conversations into every deal. With tools like ValueCore Discovery Whiz™ and Value Collaborator™, your sales teams can justify higher pricing, upsell effectively, and close larger contracts, making increasing ACV a repeatable, predictable outcome.