Description
Annual Contract Value (ACV) is the total revenue that a company fetches from a contract or client in a year. This metric is mostly used by SaaS companies since these generally have yearly or multi-year contracts with clients. ACV is also known as an annual average of total contract value (TCV). ACV calculations are based on recurring revenue from a single client or account. Therefore it normally doesn't include one-time fees.
Example
ACV formula = Total contract value / Total years in the contract. Suppose a client signs a 5-year contract with a company for using its software. The contract value is $50,000. Therefore, the annual contract value will be $50,000/5 = $10,000. If there is an initial signup fee of say $150, this amount will not be included in the ACV.
Why it matters
ACV, on its own, doesn’t allow companies to derive valuable insights as the average contract size can differ across businesses and largely depend on the sector and target audience. But, if it is used along with other metrics like customer acquisition cost (CAC) and customer lifetime value (LTV), ACV can offer critical insight into the company's marketing efficiency and profitability.