What is Annual Contract Value (ACV)?
Annual Contract Value (ACV) is a metric used by subscription-based businesses to measure the average annualized revenue generated from a single customer contract, excluding one-time fees or variable usage charges. It’s particularly valuable for SaaS and enterprise software companies in assessing the predictable, recurring portion of a customer’s value over a year.
How ACV is Calculated
For multi-year contracts, the total contract value is divided by the number of years.
One-time implementation or setup fees are typically excluded from ACV, as it focuses on recurring revenue streams.
Formula:
ACV = (Total Contract Value - One-Time Fees) ÷ Contract Term in Years
Example
A company signs a 3-year SaaS contract worth $90,000, including a $5,000 one-time implementation fee. ACV = ($90,000 - $5,000) ÷ 3 = $28,333.33
Why It Matters
Helps forecast predictable, recurring revenue.
Enables better sales performance benchmarking.
Allows segmentation of customers based on contract size.