What is Annual Contract Value (ACV)?
ACV (Annual Contract Value) refers to the total value of a customer contract, averaged over a year. It’s used in subscription-based businesses to measure the annual revenue generated from each customer, giving you a sense of the predictable, recurring income from a single contract. ACV is particularly helpful for businesses that deal with multi-year contracts or different billing cycles.
Why is it Important to Measure ACV?
Measuring ACV is crucial because it helps you understand the long-term value of your customer relationships and how much revenue you can expect on an annual basis. It also allows you to evaluate the health of your business and see trends over time, such as whether your average deal size is growing or shrinking.
Tracking ACV can help with forecasting and planning, as it provides a clear picture of how much recurring revenue you can expect to receive.
How Do you Calculate ACV?
The “Total Contract Value” represents the total value of a customer’s subscription contract, and the “Number of Years in Contract” is the duration of the contract (typically one year for an annual contract).
ACV is calculated by dividing the total contract value by the number of years in the contract. For example, if a customer signs a 3-year contract worth $300,000, the ACV would be $100,000 per year. If the contract is only for a single year, the ACV is simply the total contract value for that year.
It’s worth noting that ACV can vary based on the billing frequency (monthly, quarterly, annually) and the length of the contract.
The formula for calculating Annual Contract Value is:
Formula
ACV = Total Contract Value / Number of Years in Contract
How To Improve ACV?
Improving ACV involves increasing the value of the contracts you sign with customers. This can be done by upselling or cross-selling additional products or services, offering premium tiers or packages, or focusing on selling to larger customers with bigger needs. Additionally, improving the customer experience can encourage clients to commit to longer contracts or higher-value deals. A strategic approach to pricing and bundling your offerings can also help drive up the ACV over time.
