Software Growth

ACV (Annual contract value)

ACV is the average yearly recurring value of a customer contract, found by dividing the contract's recurring value by its length in years.

ACV puts contracts of different lengths on one yearly scale, so a one-year deal and a three-year deal can be compared directly. It describes a single contract or an average across contracts, and it is the number that tells you what kind of sales motion you can afford.

How to calculate ACV

Stripe's guide defines it as the total recurring value of a contract divided by its duration in years, and says to leave out one-time fees such as setup.

A customer signs a three-year agreement at $36,000 in recurring fees, plus a $3,000 setup fee. ACV is 36,000 / 3 = $12,000. The setup fee is excluded. Stripe cautions that ACV is not rigidly standardized, so consistency within your own company matters more than matching an outside definition.

ACV vs ARR vs TCV

  • ACV is one contract (or the average contract), annualized.
  • ARR is the sum of recurring revenue across all current customers, annualized.
  • TCV is the full value of a contract over its whole term, which can include one-time fees. In the example, TCV is $36,000 + $3,000 = $39,000.

If you had ten customers each with a $12,000 ACV, ARR from them would be $120,000. The same contract is $1,000 of MRR.

Why ACV matters to a founder

Rob Walling lists ACV among the metrics to keep high, because a higher one makes more acquisition channels viable and speeds growth (episode 620). Roughly, a $300 ACV rules out outbound sales calls, while a $15,000 ACV can pay for them. Your ACV decides which of the channels you can use.

ACV is also often confused with average contract value. The two terms are used interchangeably in many places and the abbreviation is the same. Where a company uses both, ACV is annualized and average contract value may cover the whole contract, so state which one you mean.

Common mistakes

  • Including one-time fees. They inflate ACV and make revenue look more recurring than it is.
  • Using it as a revenue figure. It measures deal size at signature, not what has been earned or billed. See bookings.
  • Ignoring ramps. If year one costs $6,000 and year three $18,000, state whether ACV is the average ($12,000) or the first-year value.

Small SaaS angle

Most self-serve products have an ACV under $1,000 and track MRR instead. ACV becomes useful once you start selling annual plans or custom contracts, and when you decide whether to hire a salesperson: divide their cost by your ACV to see how many deals they must close just to cover themselves.

Sources

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