Annual Contract Value (ACV) Definition

What is Annual Contract Value (ACV)?

Annual Contract Value (ACV) is a key SaaS metric representing the average revenue earned per customer contract per year. It breaks down the total contract revenue into an annualized figure, allowing subscription-based and SaaS businesses to understand their average yearly earnings from each contract. This insight is critical for setting pricing strategies, assessing contract profitability, and benchmarking revenue growth.

For example, if a client signs a 3-year contract worth $150,000, the ACV would be $50,000 per year. Importantly, ACV usually excludes any one-time setup fees, focusing on the recurring portion of the revenue.

Annual Contract Value (ACV) vs. Annual Recurring Revenue (ARR): Key Differences

While both Annual Contract Value (ACV) and Annual Recurring Revenue (ARR) are vital metrics for SaaS and subscription-based businesses, they serve different purposes and provide unique insights into revenue. Here’s how ACV and ARR compare:

Annual Contract Value (ACV)

ACV offers insight into the yearly worth of individual contracts, making it easier to compare contracts of varying lengths and assess annualized revenue per customer.

Annual Recurring Revenue (ARR)

ARR provides a big-picture view of the company’s total recurring revenue, helping track overall growth, forecast trends, and inform strategic decision-making.