What is Annual Contract Value (ACV)?

Annual Contract Value (ACV) is a sales metric used mainly by SaaS and subscription-based businesses. It represents the value of a contract over a 12-month period.

To calculate ACV, take the total value of a customer contract and divide it by the number of years in the contract. For example, a $30,000 contract over three years has an ACV of $10,000.

ACV is useful for comparing contracts of different lengths. It gives a standardized view of customer value. This helps in forecasting and financial planning.

Sales teams often use ACV to set quotas and measure performance. A higher ACV generally means each sale is more valuable. However, it's important to balance this with other factors like customer acquisition cost.

ACV can also guide pricing strategies. Companies might offer discounts on longer contracts to increase ACV. Or they might focus on upselling to increase the ACV of existing customers.

Remember, ACV is different from recurring revenue. It includes one-time fees spread over the contract length. This can make it higher than the actual recurring revenue.