Annual Contract Value (ACV) in sales defines deal worth and revenue potential. Know how to calculate ACV, understand contract values & use it effectively.
Author: Abhilash Dama
When I first started my journey in marketing, I would celebrate every new deal without thinking about its long-term value. Over time, I realized that not all customers are equal, some bring more value over the course of a year than others.
That’s why it’s important to know what ACV is in sales . Understanding this metric helps you focus on the deals that truly drive growth and gives your sales team a clearer picture of where to invest time and effort.
ACV in sales stands for annual contract value. It measures the average annual revenue a customer generates from a contract, excluding one-time fees. This ACV metric is crucial for understanding customer value and forecasting annual recurring revenue (ARR).
For example, if a customer signs a 3-year contract worth $36,000, the ACV is $12,000 per year.
To put this into perspective, for private SaaS businesses, the median ACV is approximately $26,265, up from $22,357 the previous year. This shows how ACV can vary based on company size and deal structure, but also how tracking it consistently provides valuable insight into growth and revenue trends.
Understanding ACV is key for measuring the value of a customer and forecasting revenue. Unlike looking only at contract values, ACV shows the average annual dollar amount a customer contributes, which helps businesses plan more effectively.
Here’s why ACV is critical:
Before your sales team can leverage ACV to guide decisions, you need to know how to calculate it. The process is easy and can be applied to any customer contract or subscription contract.
Here’s a step-by-step guide:
Step 1: Determine the Total Contract Value
Start with the total value of the contract, including recurring revenue but excluding any one-time fees. This represents the full revenue potential of the customer contract.
Step 2: Identify the Contract Duration
Note the years in the contract or subscription period. This is important for calculating the annual value accurately.
Step 3: Divide the Total Contract Value by the Contract Duration
Use the below formula for ACV:
ACV= (Number of Years in the Contract) / (Total Contract Value)
This gives the average ACV per year for the specific contract.​
Step 4: Calculate ACV for Multiple Contracts
For businesses with multiple subscription contracts, calculate ACV for each and then average them to get the average ACV across all contracts. This helps your sales team prioritize high ACV accounts and optimize sales strategies.
Suppose your company signs a 3-year subscription contract worth $30,000, with an additional $6,000 service fee in the first year. First, add the base contract and add-on: $30,000 + $6,000 = $36,000 total contract value. Then divide by the contract length:
36,000÷3=12,000
The ACV is $12,000
If a customer has several subscription contracts, calculate the ACV for each and sum them to find the total annual value.
Suppose a customer has:
Step 1: Calculate ACV for each contract
Step 2: Sum the ACVs
$9,000 + $8,000 + $6,000 = $23,000 total ACV per year
This shows the total annual contribution from the customer, helping your sales team focus on high ACV accounts, plan sales strategies, and forecast ARR accurately.
Once you know the total value of a customer's contract, your sales representatives can turn that insight into actionable strategies to increase revenue.
While ACV helps focus on individual customer contracts, it’s important to also consider your overall recurring revenue, which is where understanding ARR becomes essential.
Many companies confuse ACV (annual contract value) with ARR (annual recurring revenue), which can distort growth forecasts and customer value assessments. Making this mistake in your own business can lead to inaccurate planning and limit your ability to scale effectively.
Here's a quick comparison table for you to better understand:
| Aspect | ACV (Annual Contract Value) | ARR (Annual Recurring Revenue) |
|---|---|---|
| Definition | ACV represents the average annual value of a customer’s contract. It’s calculated by dividing the total contract value by the number of years in the contract. | ARR is the total value of all contracts that generate recurring revenue within a single year. |
| Purpose | Helps measure the average value per year for each customer and identifies which contracts contribute the most to long-term growth. | Helps businesses understand overall revenue performance and track predictable income from annual subscriptions. |
| Focus | Focuses on the value of a single customer contract, allowing teams to use ACV to prioritize high-value clients and plan personalized strategies. | Focuses on the total recurring revenue across all customers, giving a full picture of business financial health. |
| Calculation | ACV is calculated by dividing the total contract value by the number of years. | ARR is the total value of all recurring contracts within a year. |
| Use Case | Sales reps and account managers need ACV to identify upsell opportunities and measure average annual performance. | Executives and finance teams rely on ARR to evaluate annual revenue stability and long-term growth. |
| Insight | ACV provides a customer-level view and helps in calculating annual contributions to revenue. | ARR offers a macro-level view of business performance, showing steady income from renewals and bookings that take the total contract into account. |
| Key Benefit | ACV allows sales teams to see how ACV trends help businesses identify strong and weak customer segments. | ARR shows how consistent recurring income supports growth and long-term planning. |
| Common Misunderstanding | Some think ACV and ARR are the same, but ACV measures the average annual value per customer, while ARR measures the total company-wide recurring income. | ARR is often compared to ACV, but unlike ACV, ARR includes all active recurring deals, not just individual contract averages. |
Maximizing ACV means focusing on the contracts that drive the most revenue. Through contract value analysis and ACV tracking, sales teams can focus on high-value accounts, enhance annual value, and drive more subscriptions.
These strategies show exactly how to achieve this:
Extending contract durations is a powerful strategy to increase ACV in business. By encouraging clients to commit to longer agreements, you naturally boost the average yearly value of each contract and create more predictable revenue streams.
Research shows that SaaS companies with multi-year contracts (around 2.5 years) experience an average churn rate of just 8.5%, compared to over 16% for month-to-month contracts. This demonstrates how longer contracts not only raise ACV but also improve customer retention.
Practical ways to implement longer contracts:
After securing longer contracts, the next step is to increase the value of a customer’s contract through strategic bundling and upselling. Combining complementary products or encouraging upgrades can significantly raise average yearly value and boost ARR without acquiring new clients.
Ways to implement this effectively:
Building strong, trust-based relationships with customers is essential for reducing churn and increasing ACV. Companies that maintain regular check-ins and provide proactive support see up to 50% higher renewal rates compared to those that don’t. This shows that consistent engagement directly impacts contract renewals and overall customer value.
Practical ways to strengthen relationships include:
With a clear view of customer contracts and average annual value, sales teams can pinpoint where revenue growth is most likely. Understanding which accounts contribute the most, allowing you to focus efforts on opportunities that really move the needle.
This is where Qoli can help. It is an AI-powered sales app that helps teams capture, analyze, and act on insights from customer interactions. It simplifies understanding which accounts are driving the most value and highlights opportunities to grow revenue.
With Qoli, sales teams can:
Even experienced sales teams can make errors when calculating ACV, which can lead to misinformed decisions and missed growth opportunities. Being aware of these common pitfalls ensures that your average yearly value calculations remain accurate and actionable.
Common mistakes include:
Knowing what ACV in sales is crucial for understanding how much each customer contributes annually. By looking at the annual contract value and observing ACV trends, your sales teams can focus on high-value accounts, plan renewals strategically, and explore opportunities to grow revenue.
ACV provides a realistic picture of customer value over time, helping businesses make informed decisions and strengthen their overall financial health.
