What is ACV (Average Customer Value) in SaaS? Calculation, Formula & Importance
In SaaS accounting, ACV is calculated by dividing a contract's total recurring value by the number of years it covers. It answers a simple question: How much revenue does a single customer contract generate in one year?
By taking the recurring portion of a contract and normalising it to a 12-month figure, ACV makes it easier to compare deals of different sizes and lengths. Whether a customer signs for 6 months or 5 years, ACV allows you to view them side-by-side.
How Do You Calculate ACV in SaaS?
The formula for calculating Annual Contract Value is straightforward. It allows you to turn multi-year contracts into comparable annual figures.
The ACV Formula
ACV = (Total Contract Value – One-Time Fees) / Number of Years in Contract
ACV Calculation Examples
To understand how this works in practice, let’s look at three common scenarios:
Scenario 1: The Multi-Year Deal An enterprise SaaS company signs a customer for a 3-year term.
- Total Contract Value (TCV): $300,000
- One-time onboarding fee: $15,000 (Excluded)
- Recurring Revenue: $285,000
- Calculation: $285,000 / 3 years
- ACV: $95,000
Scenario 2: The Monthly Subscription A customer signs up for a monthly plan of $100.
- Monthly value: $100
- Calculation: $100 x 12 months
- ACV: $1,200
Scenario 3: The Short-Term Contract A client signs a 6-month contract for $60,000.
- Total Value: $60,000
- Calculation: To find the annualized value, you project what this would be over a year.
- ACV: $120,000 (Note: This assumes the contract renews or is standard for the year).
Key Considerations for Calculations
- Excluding One-Time Fees: Companies typically remove charges like setup fees, onboarding, or custom implementation. These inflate the first invoice but do not reflect ongoing recurring revenue.
- Internal Consistency: ACV is not a standardised GAAP accounting metric (unlike revenue). Definitions can vary by business. Some companies might include upsells immediately, while others wait for renewal. The most important rule is to apply your chosen method consistently across all metrics.
What is the Difference Between ACV and ARR?
While they sound similar, ACV and ARR (Annual Recurring Revenue) serve different purposes.
- ACV is a deal-level metric. It looks at a single contract.
- ARR is a company-level metric. It looks at the total revenue from all active subscriptions.
Comparison: ACV vs. ARR
When to Use Each Metric
- Use ACV to set targets for sales representatives. It helps define the average deal size needed to hit goals.
- Use ARR to track overall company growth. Investors value SaaS companies based on ARR because it is a clean, standardised number that allows for benchmarking against competitors.
How Does ACV Differ from TCV?
TCV (Total Contract Value) zooms out to show the total financial commitment, while ACV zooms in on the annual impact.
Definition and Scope
- ACV: The recurring revenue a customer pays over one year.
- TCV: The total revenue expected over the entire life of the contract. This includes recurring fees plus one-time fees (setup, training, professional services).
Practical Applications
A SaaS company should use ACV when analysing sales team performance across deals of different lengths. It "normalises" the data.
However, TCV is better when evaluating major enterprise deals with heavy implementation fees. Finance teams use TCV to understand cash flow and total revenue forecasting.
Example: A 3-year contract at $50,000/year with a $20,000 setup fee.
- ACV: $50,000 (Recurring revenue only, annualised).
- TCV: $170,000 ($50k x 3 years + $20k setup).
Why ACV Matters for Your Business Strategy
ACV is more than just a number for the finance team; it directly shapes your sales and marketing operations. It impacts the following areas of your business strategy:
- Sales Strategy and Quotas: ACV helps teams analyse pipeline quality. If a sales rep closes 10 deals, but the ACV is low, they may generate less revenue than a rep who closes 2 deals with high ACV. Many sales teams prioritize ACV to align incentives with revenue impact rather than just deal volume.
- Pricing and Packaging: ACV reflects what customers are willing to pay annually. If your ACV rises after a pricing change, it is a strong signal that your product's perceived value matches the price. If ACV drops, you may be discounting too heavily to close deals.
- CAC and Unit Economics: ACV dictates how much you can spend to acquire a customer (CAC).
- High ACV ($50k+): You can afford an expensive field sales team and long sales cycles.
- Low ACV ($100 - $5k): You need a low-touch or "product-led growth" (PLG) model. You cannot afford to spend $5,000 acquiring a customer who only pays $1,000 a year.
High vs. Low ACV: Which is Better?
There is no "correct" ACV. Successful SaaS companies exist at both ends of the spectrum.
- Low ACV (e.g., Spotify, Slack, Dropbox): These companies focus on volume. They have thousands or millions of users. Their strategy relies on low churn, viral growth, and low support costs.
- High ACV (e.g., Salesforce, Workday, ServiceNow): These companies focus on large enterprise contracts. They have fewer customers, but each contract is worth significantly more. Their strategy relies on high-touch sales, account management, and custom implementation.
It is crucial to benchmark properly. Comparing a PLG company's ACV to an Enterprise SaaS company's ACV will lead to poor decisions.
FAQ
Should one-time fees be included in ACV calculations?
Generally, no. Most SaaS companies exclude setup, training, and onboarding fees from ACV to keep the focus on recurring revenue. However, because ACV is not a regulated accounting term, some businesses choose to include them. The key is to be consistent.
Can ACV be higher than ARR?
No. ARR is the sum of all ACVs across your entire customer base. However, for a single new customer, their TCV (Total Contract Value) can be higher than their ACV if the contract is longer than one year.
How does churn affect ACV?
Churn does not change the ACV of a signed contract, but it affects the Average ACV of your customer base. If high-value customers churn (leave) while low-value customers stay, your company's average ACV will drop, signaling a problem with enterprise retention.
Conclusion
ACV is an essential SaaS metric that normalizes contract revenue to annual figures. By dividing the total recurring value by the contract term in years, businesses gain clear visibility into deal quality.
Understanding the distinctions between ACV (deal value), ARR (total recurring revenue), and TCV (total commitment) allows SaaS companies to make smart decisions about pricing, sales compensation, and growth.
For optimal results, track all three metrics. Use ACV to measure sales efficiency, ARR to measure company growth, and TCV to measure total cash flow and commitment.
At Team 4 Agency we build inbound marketing engines that drive growth for B2B SaaS and technology companies. If you would like to discuss how we can improve your inbound marketing, book a short session with our team. We will show you exactly where to focus next.
