Annual contract value

What is annual contract value (ACV)?

The annual contract value (ACV) of each customer contract represents the annual revenue generated, excl. Fees. You will have $10,000 in annual contract value if a customer signs a 5-year contract for $50,000. Now let’s understand how to calculate the formula for ACV.

The formula for calculating the value of an annual contract

Calculating ACV and determining the average contract’s annual value can be done in a few ways. For example, your analytics tools may allow you to segment your customers or markets based on market segments. Also, you can use ACV to benchmark your company against others in the same industry. You should, however, compare apples with apples using the same calculation method.

Contract revenue is the only metric most SaaS companies use to calculate their ACV, despite not being a standard metric like annual recurring revenue (ARR) or monthly recurring revenue (MRR).

When comparing information, exclude the following:

• Costs associated with setup
• Services for installation
• Fees for initiation
• Charges for onboarding

In the case of long-term contracts, method #1 is to divide the total contract value (TCV) by the number of years the contract has. $3,000 per year is the annual cost of a three-year contract with a TCV of $9,000 plus a $250 setup fee.

$9000/3 Years = $3000 ACV

A segment’s average TCV can be calculated by dividing the segment’s total TCV by the segment’s total contract period.

Method #2 for short-term contracts: annualize the revenue from the subscription. Assuming the contract automatically renews and the customer doesn’t churn, a six-month contract for $4,000 has an ACV of $8,000.

The formula for annual contract value

Divide the normalized total contract value (TCV) by the contract term length to calculate the annual contract value (ACV).

The term “normalized” refers to the elimination of one-time fees in this context.

Example of SaaS ACV calculation

Do you offer SaaS services? Are you interested in calculating your Annual Contract Value (ACV)? It’s for you if you do!

The following steps will help you calculate the ACV of your SaaS company:

1. The first step is determining the total contract value (TCV). An annual contract’s value is how much money your company has collected.
2. Find out what your churn rate is. Each year, this percentage represents the number of customers who cancel or do not renew their contracts.
3. Multiply your TCV by your customer churn rate to calculate your ACV.

An ACV of $50,000 would result from your TCV of $1,000,000 and your customer churn rate of 5%.

Your SaaS company’s health can be tracked using this calculation. If your ACV increases, you’re acquiring and retaining new customers. You lose customers if your ACV decreases.

Your SaaS company’s ACV is an important indicator of its health. An increase in ACV indicates that you need to improve your customer retention.