Annual Contract Value (ACV) is the average annualized value of all active customer contracts. ACV can be described as the average customer ARR, and is often used to describe the size of a contract for a SaaS business.Unlike TCV, ACV is annualized and standardized across all contracts.
How is ACV calculated?
ACV is the sum of all of the active, non-annualized contract values and reflects non-recurring revenue in the total value. Additionally, ACV reflects mid-contract changes by changing the total contract value to reflect the expansion or contraction.
We can calculate ACV from ARR, non-recurring revenue, and mid-contract changes. Let’s look at a few examples:
1. ACV from ARR
If a customer is paying $150,000 ARR for 3 years, the ARR is $150,000. Since ARR is already an annual figure, the ACV is also $150,000.
2. ACV with Non-Recurring Revenue
Let’s take a customer that has purchased the following products:
ACV is $18,000 + $6,000 + $1,000, or $25,000. Note that ACV includes the amount for the non-recurring Starter Implementation product. SaaSGrid allows you to enable or disable including non-recurring revenue products in ACV.
3. ACV with Mid-Contract Change
For contracts that have a co-termed change during an active contract, ACV will be adjusted to count the revenue of the change, not the run rate. With contractions and expansions in ARR, we can represent the total changes in ACV.
For example, if a customer starts with 10 users seats for $100 per month for 12 months, the ACV will be equivalent to 10 seats x $100 x 12 months, or $12,000. If the customer decides to purchase 10 more user seats after 4 months on the same contract, the expansion amount will be $10 seats x $100 x 8 remaining months, or $8,000. This $8,000 expansion plus the original $12,000 yields a total ACV of $20,000. We can represent the ARR change and the ACV in the following way:
The ARR change May indicates the change in the contract value, and the ACV expands by the ARR expansion amount.
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