Article

How To Calculate ACV (Annual Contract Value)

In SaaS, Annual Contract Value (ACV) is the annualized value of a customer.

The ACV formula is important for SaaS teams that primarily sell on annual or multi-year subscription plans.

Here's everything you need to know about ACV, including how to calculate it and what it means for your SaaS business.

What is ACV (Annual Contract Value)?

Annual Contract Value (ACV) is the average value of a customer's subscription over the course of a year.

How to calculate ACV

The ACV formula takes into account the length of a customer's subscription but typically ignores any upfront payments. Here’s the ACV calculation formula:

Annual Contract Value Calculation Example

Let's say you have three different customers signing up for subscriptions with your company.

The table below shows the ACV calculation.

Average Annual Contract Value Calculation

So far, we have discussed the Annual Contract Value (ACV) for individual customers. However, when this metric is mentioned at a company level, it usually refers to the average ACV.

Average ACV is the average of each individual customer's Annual Contract Value.

It corresponds to the average amount of money a company charges per customer per year, excluding one-time fees.

Note: ACV isn't always a relevant SaaS metric

If your SaaS business is solely focused on monthly subscriptions and does not incentivize users to subscribe to annual or multi-year contracts, then the ACV formula might be an irrelevant performance metric.

Annual Contract Value (ACV) vs Customer Lifetime Value (LTV) vs Annual Recurring Revenue (ARR)

ACV and LTV are similar concepts. In fact, the difference between ACV and LTV is simple.

• ACV is the average amount of money a customer is charged per year.
• LTV is the average amount of money a customer is charged across the entire time they're a customer.

The difference between ACV and LTV is also easy to spot.

• ACV is the average amount of money a customer is charged per year.
• ARR is the total amount of money all customers are charged per year.

What is the typical SaaS ACV and Contract Length?

A survey of 400 private SaaS companies found the median ACV is $21,000.

In this 2017 survey, 26% of the SaaS company respondents said their ACV came in below $5,000, while 13% had their ACV above $100,000.

The average contract length in SaaS is about 1.4 years.

This survey provides some insights, but it doesn't paint a complete picture. The sample is relatively small and it does not account for the varied pricing models and structures of SaaS companies.

How can you increase ACV?

Here are a few key ways to increase your company's Annual Contract Value:

• Add new SaaS product features or upsell existing users. This could involve adding new features or selling additional products to your existing user base.
• Raise prices. If you have a sticky user base that values your product, they will likely be willing to pay more for it.
• Increase your contract length. This could involve moving from monthly to annual contracts, or offering discounts for longer-term contracts.
• Refine and refocus your sales processes. Improving your sales process and focus on upsell and cross-sell deals. ACV can be a helpful metric to evaluate the performance of your sales team.

ACV Calculation (Final Thoughts)

ACV is only one part of the story.

To get a complete picture of your business, you need to consider ACV alongside other key metrics such as customer churn rate and lifetime value.

That being said, the ACV calculation can still be a helpful exercise for evaluating the performance of your sales team and understanding the revenue potential of your customer base.

If you're looking beyond ACV and want to increase customer lifetime value, you need Raaft in your corner.

Our customer feedback solution enables SaaS companies to reduce churn and save customers with retention flows. Get started for free today.