Annual Contract Value (ACV)Link to this section
Annual Contract Value (ACV) is the average revenue generated by a customer contract, averaged out annually and excluding fees. It gives you a clear picture as to how much consistent revenue a customer will bring in, and allow you to compare the value of different customers to your business.
What is Annual Contract Value (ACV)?Link to this section
Annual Contract Value (ACV) is a metric used to measure the average revenue received from a particular customer, yearly over the course of their contract.
How to Calculate ACV?Link to this section
First, measure your Total Contract Value (TCV), which is the total revenue brought in by a customer, excluding all the one-off fees like onboarding or hardware.
Then simply divide that by the number of years on the contract.
ACV = TCV / Length of contract (years)
What is the difference between Annual Contract Value (ACV) and Annual Recurring Revenue (ARR)?Link to this section
ACV and Annual Recurring Revenue (ARR) are both metrics used to calculate the annual revenue brought in by customers. But, there are a few key differences between these two metrics.
While ACV calculates the revenue brought in by a single customer or account, ARR calculates the revenue brought in by all customers or accounts collectively.
|Annual Contract Value (ACV)||Annual Recurring Revenue (ARR)|
|Calculates the value of a single subscription account||Calculates the value of all subscription accounts|
|A normalized metric measuring performance over various contract periods||Is a standardized metric evaluating performance at one point in time|
|Can be used to pinpoint your highest vs lowest-value customers||Only looks at customer value holistically on a year-by-year basis|
Use cases for ACV and ARRLink to this section
AVC is a useful tool in helping you evaluate where your marketing efforts should be focused on. You can use ACV to segment accounts by different industries and understand which industries bring in the most revenue to your business.
On the other hand, ARR can be a useful metric in examining overall revenue growth on a yearly basis and for comparing your business’s revenue growth against industry competitors.
Applying ACVLink to this section
ACV, combined with other SaaS metrics, can enhance your strategic decision-making and improve your sales and marketing efforts based on data-driven insights.
You can use ACV to identify lower-value customers and offer additional products or services by upselling or cross-selling products and negotiating contract extensions.
For sales representatives, ACV can be used to understand your customers better and improve your customer acquisition and retention strategies.
Tips for increasing your ACVLink to this section
It’s important to remember that a low ACV isn’t necessarily a bad thing, but it largely depends on your target audience. There are various ways you can increase your ACV, from focusing on customer service to proactively upselling and cross-selling to customers.
Customers are at the forefront of SaaS business models, so it’s important to nurture your customers so they are getting the best user experience possible.
Plus, customers don’t want to wait hours waiting for an email reply to get their problems sorted, so offering live chat support can further enhance the user experience and boost customer retention.
Upselling and cross-selling to your customer base is one of the best ways to increase ACV and generate more revenue. Upselling involves selling additional features or offering an upgraded or premium version of the current product or service being used, while cross-selling involves selling related products or services in addition to core products.
By helping customers see the value in your products or services and upselling and cross-selling based on their previous purchasing experience, needs and wants, you can effectively get existing customers to purchase more from your business and increase your ACV.
Plus, it’s important to be constantly looking for ways to improve and iterate your product to better suit the needs of your customers. Gather customer feedback, drill down into the problems they’re facing, and prioritize new product releases that best align with their needs and pain points.
ACV is an important SaaS metric used to measure the amount of revenue brought in by a particular customer on a yearly basis. When used in combination with other SaaS metrics, ACV can be useful in identifying your lower-value customers and using sales and marketing strategies to convert them into higher-value customers
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