Average Contract Value Meaning
Average contract value (ACV) is a measure of the average value of customer contracts normalized over a one-year period. The ACV is mainly used by companies that have annual or multi-year contracts such as SaaS companies. It is also referred to as the annual contract value.
If your business has 10 customers and an average recurring revenue (ARR) of $1 million, the ACV is $100,000. You can also calculate the ACV by taking the total value of a customer contract and dividing by the length of the contract in years. For example, if a customer pays a $100 sign up fee and then $10 per month for three years, the ACV is ($100 + (36 x $10)) / 3 = $154.
There’s no specific contract value that’s ideal for all companies. Businesses have found success with an ACV in the tens of dollars (such as Netflix) or in the thousands of dollars for B2B clients (like Salesforce). Tracking whether the trend is upward or downward is more important than the amount.
The ACV is a marketing metric that helps the business plan how it will grow and scale by acquiring fresh customers. It is a reliable indicator of customers’ purchasing behavior and allows the identification of cross-selling and upselling opportunities within your existing customer base. You can better see the channels that are most responsible for revenue and sales growth.
It is most useful when compared to other KPIs and metrics such as ARR, customer acquisition cost and customer churn to get a better picture of the business trajectory. This would inform key decisions around marketing, sales, product development and pricing strategy.