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Annual contract value (ACV) is a SaaS sales metric used to measure the average annualized revenue generated per active individual customer. The term "annualized" just means that the potential revenue is calculated for a 12-month period.
Many businesses don't include one-time fees like setup or onboarding costs when calculating ACV.
By tracking your ACV, you can develop and optimize your business strategy, pricing strategy, and market strategy to boost your company's growth over time. Like any industry standard metric, however, ACV works best when combined with other SaaS measurements like customer churn rate and customer acquisition cost (CAC). Used alongside other key metrics, ACV can be a valuable metric to help you make important decisions about your business model and organizational performance.
Additionally, something to keep in mind is that business performance does not always correlate with a high or low ACV. A company with millions of customers but a relatively low ACV could be doing well financially. Whereas a company with a few customers but a relatively high ACV might not be generating enough revenue according to its business strategy. This is why using a mix of metrics is the best way to tell how profitable an organization is.
Two KPIs that are frequently confused are ACV and ARR. Although both are annual revenue-related metrics, they have different objectives.
The ACV metric measures the average revenue you make per single customer. This number gives valuable insight into the amount of money you are making per subscription account.
The ARR metric, on the other hand, measures how much recurring income you are making from all your subscription accounts on an annual basis. This implies that during the year, neither your customer base nor your pricing approach will change.
In short, ACV typically evaluates the value of one customer's subscription during a 12-month period, whereas ARR measures numerous accounts simultaneously.
The most important difference between the two metrics is that TCV represents the total value of an entire contract term, which usually involves a multi-year subscription, while ACV calculates the average customer value over a specific time period, which is typically one year.
While both metrics are used throughout the industry, some companies prefer to use one over the other depending on the type of information they want to convey. For example, some aspects to consider are that the total value of the customer contract includes one-time fees and ongoing monthly payments, whereas the ACV does not. Moreover, because it normalizes contract terms, the ACV offers a more simple comparison between consumers.