Oct 8, 2024
Are you facing difficulty in determining the actual worth of your customer contracts? If yes, you are at the right place.
In SaaS and subscription-based companies, it is often difficult to define which customers are generating the most value for the company. These missing links can result in wrong resource allocations and wrong sales strategies. Here comes ACV – Annual Contract Value.
Here in this article, we’ll be taking you through everything that you should know about ACV and how it can revolutionize your sales.
What is ACV (Annual Contract Value)?
Are you struggling to organize your sales tactics properly? This is where Annual Contract Value (ACV) can come in handy. ACV stands for Annual Recurring Revenue per Client, which refers to the gross aggregate value of annual revenue from client contracts less one-time charges. It is an effective method for SaaS and subscription-based companies to measure customer worth, manage price policies, and invest in the best customers.
How to Calculate ACV?
Annual Contract Value (ACV) is the average annualized revenue generated from a customer contract. To calculate ACV, use this formula:
ACV = Total Contract Value - one-time Fees ÷ Number of Years in Contract
Example calculation:
Let's say you've signed a 3-year contract with a client for $90,000, with no additional fees.
ACV = $90,000 - 0 ÷ 3 years = $30,000
This means the Annual Contract Value for this customer is $30,000.
Importance of ACV in Sales
Awareness of ACV is therefore very important in helping you increase your sales and business success. Here's why ACV matters:
It assists in the determination of valuable customers
Guides resource allocation
Informs pricing strategies
Involved in the assessment of the sales performance
Facilitates forecasting of revenues in the business
ACV vs. Other Sales Metrics
While ACV is valuable, it's essential to understand how it differs from other key sales metrics. Let's compare ACV with two commonly used metrics: ARR and TCV.
ACV vs. ARR (Annual Recurring Revenue)
While ACV is defined as the average annual value of the contracts with the customers, ARR is the total annual recurring revenue from customers. ARR offers an abstraction of the financial health of your business while ACV offers what the value of certain customer base costs from the ground up. For instance, while you have 100 initial clients and the average ACV is $10,000, ARR will equal $1,000,000.
ACV vs. TCV (Total Contract Value)
TCV captures the total value of a contract and this can be one-time charges and multiple-year charges. ACV, however, scales this value on an annual basis. For example, a $90,000 annual contract with a $10,000 initial payment means a TCV of $100,000, but an ACV of $30,000. Thus, ACV presents a more uniform picture of contract value regardless of the contract length.
Conclusion
ACV is an impactful metric that can provide insights into customer value and contract performance. However, when it comes to organizational decisions involving budgeting, pricing, and sales forecast, it’s important to consider the ACV so as to have better insights. But remember that ACV is more valuable when it is combined with other metrics, for example, ARR or TCV. There is always a way to use the available sales metrics to take your business to the next level.
FAQs
What does ACV stand for?
ACV means Annual Contract Value. It refers to the average annualized value of revenues a firm gets from a customer contract, excluding any other one-off charges.
What does ACV do?
ACV enables firms to determine the annual worth of customer contracts. It is used in the assessment of sales opportunities, sales profitability, customer value determination, and price positioning.
What is ACV for sales?
The annual contract value is a measure found in sales that calculates the value of the customer contracts on an annual basis. It assists sales managers in account selection, goal setting and evaluation of strategies within their sales teams.