Annual Contract Value is the average annualized revenue per customer contract. It excludes any one time fees.
For example, if you had one customer who signed a 3 year contract for $36,000, your ACV is $12,000. If you have 100 customers on a monthly plan at $1000 per month, your ACV is also $12,000.
Annual Contract Value isn’t a very valuable metric by itself, but it becomes super important when compared to other metrics. If you compare Annual Contract Value to Customer Acquisition Cost, you can see how long it takes to pay back the cost of acquiring a customer.
Know your ACV strategy
As Christoph Janz eloquently explains in his classic blog post The 5 ways to build a $100 Million Business, knowing your “hunting strategy” is critical. What your ACV is doesn’t really matter. Many successful SaaS companies have built a very large business with a small ACV (think $500/year). It just means you need to acquire a lot more customers, much more cheaply, than a company hunting $100,000/year contracts.
Average Contract Value tends to vary the most between B2C and B2B companies. Companies like Spotify will have a very small ACV, but many users and a small CAC. Companies like Citrix will have a huge ACV, but not as many users and they will spend more on CAC.
Knowing what Average Contract Value makes sense for your business (and keeping an eye on any changes) will help you make decisions about sales strategy, marketing and product development.