How To Calculate ACV (Annual Contract Value)

Trying to learn how to calculate ACV (Annual Contract Value)? You've come to the right place.

Start ups
April 15, 2022

Trying to learn how to calculate ACV (Annual Contract Value)? You've come to the right place.

As a SaaS metric, Annual Contract Value (ACV) is calculated to show the worth of a customer over the course of a year. The ACV formula is important for SaaS teams that primarily sell on annual or multi-year subscription plans.

Understanding how to calculate ACV will give you valuable insights into the health and growth of your SaaS business. 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. The ACV formula takes into account the length of a customer's subscription and any up-front payments or discounts.

For example, let's say you have a SaaS customer who signs up for a one-year subscription. The ACV for this customer would be the total value of their annual subscription. 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 is an irrelevant performance metric.

How To Calculate ACV

Imagine the best salesperson on your team signing up a new SaaS user for a 24-month contract. This contract comes to a total value of $240,000.

After a brief celebration, you start to crunch the numbers.

As the $240,000 contract is spread across 24 months, you need to divide the total figure by 24 to calculate the monthly recurring revenue. This comes to $10,000.

To calculate ACV, which accounts for a 12-month period, you can multiply $10,000 by 12, giving you $120,000. This is the Annual Contract Value of the user.

SaaS metrics do not get much easier to calculate.

Measuring ACV is only challenging when users sign up for multi-year contracts.

Either way, these are good problems to have.

As individual SaaS companies utilize different formulas to calculate their internal ACV, they may take any of the following into account:

  • One-off fees, including set-up costs. In a multi-year user contract, this can make the first year's ACV appear higher.
  • Expansion revenue, including upsells and cross-sells.
  • Customer churn rate

When SaaS companies begin accounting for one-off fees in the first year's ACV for each contract, it creates a lot of confusion.

This is one reason why some SaaS businesses choose to use Customer Lifetime Value (LTV) instead of ACV, as it smooths out the effects of one-time payments.

Why does Annual Contract Value matter?

There are two key things that Annual Contract Value tells you about your business.

The first is that it provides valuable insights into the health of your business. By calculating ACV, you can track the average value of a customer over time. This is valuable information that can help you identify whether your business is growing or stagnating.

The second thing that ACV tells you is how much revenue you can expect to generate from a customer over the course of a year. This information is useful for forecasting and budgeting purposes.

ACV is a valuable metric for SaaS businesses because it provides insights into the health of your business and helps you predict future revenue.

When it comes to securing funding and attracting venture capital, ACV is an important metric to have on hand. Investors want to understand how valuable each customer is to your business.

Calculating ACV is also a helpful exercise for internally evaluating the performance of your sales team. By understanding how much revenue each salesperson generates, you can set more ambitious targets and adjust commission rates accordingly.

How To Calculate ACV

What is a typical SaaS ACV?

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. Even though this survey provides us with some intriguing insights, it doesn't paint a complete picture.

After all, the survey sample was relatively small and they do not account for the varied pricing models and structures of SaaS companies. Rather than evaluating ACV on its own, you should take a full range of SaaS metrics into consideration.

ACV is only one part of the story. While high ACV is certainly positive as a standalone metric, it doesn't necessarily offer any insight into customer churn or lifetime value.

Also, high CAC (Customer Acquisition Cost) can make ACV look less impressive. This is why it's important to consider ACV alongside other key SaaS metrics.

How can you increase ACV?

There are a few key ways to increase your company's Annual Contract Value.

The first is by expanding the scope of your product offering. This could involve adding new features or selling additional products to your existing user base.

Another way to increase ACV is by increasing the price of your SaaS product. If you have a sticky user base that values your product, they will likely be willing to pay more for it.

A third way to increase ACV is by increasing the length of your contracts. This could involve moving from monthly to annual contracts, or offering discounts for longer-term contracts.

Finally, you can also increase ACV by improving your sales process and closing more upsell and cross-sell deals.

Is the ACV calculation useful as a metric?

As we said earlier, 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 liftime 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.

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