Definition of Annual Contract Value (ACV)
Annual Contract Value (ACV) is the average annual revenue generated from a single customer contract, excluding one-time or non-recurring fees. It normalizes contracts of different lengths to a one-year value, allowing companies to compare deals consistently regardless of whether they are monthly, annual, or multi-year agreements.
What ACV Includes
ACV typically includes only recurring subscription or license revenue associated with a customer contract. It excludes one-time charges such as setup fees, onboarding costs, professional services, implementation fees, or usage-based charges that are not contractually recurring. The goal of ACV is to capture steady, repeatable annual revenue.
How ACV Is Calculated
ACV is calculated by dividing the total recurring contract value by the number of years in the contract term. For example, a three-year contract worth $300,000 in recurring subscription revenue has an ACV of $100,000. If a customer signs a one-year contract for $25,000, the ACV is $25,000.
ACV Explained for a General Audience
ACV shows how much a customer is worth per year on average. It helps companies understand whether they are selling many small contracts or fewer large ones. A higher ACV usually means larger customers, more complex deals, and higher expectations for service and support. A lower ACV often reflects smaller customers and higher-volume, more automated sales models.
ACV and Deal Size Strategy
ACV is a key indicator of a company’s go-to-market strategy. Businesses with low ACV often focus on high-volume, self-service or product-led growth models. Companies with high ACV usually rely on sales-led motions, longer sales cycles, and more personalized onboarding and customer success. Tracking ACV over time helps companies see whether they are moving upmarket or downmarket.
ACV vs. ARR
ACV and ARR are related but serve different purposes. ARR measures the total annual recurring revenue of the entire business, while ACV measures the average annual value of individual customer contracts. A company can increase ARR by acquiring more customers, increasing ACV, or both. ACV helps explain how ARR is being built.
ACV and Sales Forecasting
ACV is widely used in sales planning and forecasting. Sales quotas, pipeline targets, and capacity planning are often based on expected ACV. For example, if the average ACV is $100,000 and a sales rep has a $500,000 quota, that implies closing roughly five average deals in a year. Changes in ACV directly affect how many deals a team must close to hit targets.
ACV and Expansion Revenue
ACV can change over time as customers expand or contract. Upsells, additional seats, or new modules increase ACV, while downsells or partial churn reduce it. Monitoring ACV alongside metrics like Net Dollar Retention helps companies understand whether customer relationships are growing in value year over year.
ACV and Customer Segmentation
Companies often segment customers by ACV to tailor pricing, sales motion, and customer success investment. High-ACV customers may receive dedicated account managers and custom support, while lower-ACV customers are typically served through scalable, automated processes. This ensures the cost of serving customers remains aligned with their revenue contribution.
Summary
Annual Contract Value represents the average annual recurring revenue generated by a customer contract. It is a core SaaS metric used to understand deal size, sales efficiency, customer segmentation, and revenue predictability. By tracking ACV alongside ARR and retention metrics, companies gain clarity on both the scale and structure of their recurring revenue.
