What is the Annual Contract Value (ACV)?
Annual Contract Value (ACV) is a way to determine how much a customer deal is worth over a year. It takes into account both recurring and one-time payments.
SaaS (software-as-a-service) companies often use this measure because it gives a clear picture of how profitable a customer is on an annual basis and can be used to judge the health of a business.
ACV is also a standard way to measure value so it can compare different companies or contracts.
This means that a customer with an ACV of $5,000 is worth more than one with an ACV of $3,000.
Synonym
- ACV
Use in Sales of the Annual Contract Value
Why ACV is an Important Measure
ACV is often used to check how healthy a business’s sales flow is. Companies can find trends and change their sales approach to fit them by keeping an eye on them over time.
One more thing that ACV is often used for is predicting future sales. If a company’s ACV is going down, it could mean that future sales will also go down.
It also gives investors a fair way to compare companies by eliminating one-time income sources like product sales.
It lets investors and experts see how a company’s recurring revenue stream grows. A healthy recurring revenue stream is essential for long-term success because it gives the business a steady stream of income that can be used to grow.
The best metrics to use with ACV
There are a lot of different measures that can be used with ACV to figure out how well a business is doing.
Adding ACV to CAC (customer acquisition cost) will give you a fuller picture of how much it costs to get a new customer.
If you want to know how much a customer is worth to your business throughout their relationship with you, CLV is an excellent tool to measure that.
This measure can help you determine if the costs of getting a particular customer will likely be worth it in the long run.
You can use the customer churn rate along with the ACV. This measure counts the number or percentage of paying customers who cancel their subscriptions or let them expire without renewing them within a specific time.
You can combine ACV with ARR (annual recurring income) to fully understand how well sales are going. ARR measures how much recurring income a business gets from its customers annually.
This metric is helpful because it measures the long-term value of a customer relationship instead of just the one-time value of a sale. This gives companies more detailed information about their sales performance and helps them find growth possibilities.
To add to ACV, TCV (total contract value) is another useful measure. When you use TCV, you can see how much the contract is worth, not just the first year. This is especially helpful for long-term contracts or deals with multiple extension periods.
You can also use TCV to see if a salesperson is offering low-value deals to make their ACV look better. By combining ACV and TCV, businesses can avoid making choices based on information that isn’t complete.
Who Should Use ACV?
ACV is essential for companies that sell subscription-based goods or services, like SaaS companies, because it lets them keep track of whether or not their customers are renewing their memberships and how much they spend each year.
Investors also use ACV to figure out how healthy a company’s business plan is. Because of these things, businesses need to understand ACV and know how to measure it correctly.
How to Figure Out the Annual Contract Value
Here are a few different ways to figure out ACV. One way is to split the gross value of all the contracts signed in a year by the number of years in those contracts.
If a company signs two $60,000 contracts that last three years each, its ACV would be $20,000.
To find out, most people divide the total value of all the contracts made in a year by the number of customers.
You can divide this measure into ACV metrics calculated monthly or every three months. This can help you keep track of customers who leave.
This is how the formula works:
Annual Contract Value (ACV) = Normalized Total Contract Value (TCV) ÷ Contract Term Length
Ways to Raise the Value of an Annual Contract
Some things that businesses can do to raise their ACV are listed below.
Adding more time to the contract is a usual solution. Customers will have more time to use the product or service, and the business will get a steady flow of money.
Adding new goods or services or giving more support could be part of expanding the scope of the contract, which is another option.
However, determining which approach is best for a business depends on whether it wants a small or significant increase in ACV.
A less expensive ACV plan
If a company wants to make $2 million a year but is only making $1.6 million, there are several things they can do to change this.
Their average yearly revenue (ACV) is only $1,000 from 1,600 customers. To hit $2 million, they’ll need to get an extra 2,000 customers, which is 20% more.
$2,000,000 ARR / $1,000 ACV = 2,000 customers
To make this happen, the company must put more money and time into the marketing funnel’s first step: awareness and attraction.
A plan for a bigger ACV
Using the same example, let’s raise the ACV from $10,000 to $20,000. At that point, the company will need about 100 customers to meet its $2 million goal.
This may sound easier, but getting these crucial clients can be challenging.
Because the contract is so big, fewer companies will fit the buyer persona. This means the company must spend more time and money researching its target group and finding the perfect client.
Once the client is on board, this resource boost doesn’t end. Because of the high monetary value, clients will likely expect a higher level of care and support, which means that individual account managers and support teams will likely be needed to provide it.
How CPQ helps SaaS businesses increase ACV
It is possible for SaaS companies that offer subscription-based products and services to increase their ACV with the help of a good CPQ tool.
A critical way for SaaS companies to raise their ACV is to point out future upsell and cross-sell possibilities.
Businesses will want to know about possible increases and cross-sell changes from one quarter to the next.
A CPQ system lets companies see their ACV broken down by current and future quarters and the types of opportunities they present, like new business and renewals. This shows them places they could upsell or cross-sell and gives them a complete picture of what’s already in place.
Businesses can get good data from CPQ tools that tell them how and why customers use their products and services. This data can help them find new business opportunities.
Technically, SaaS salespeople or DevOps can easily find the ACV for a subscription-based quote using a CPQ solution. They can do this by using formulas specific to the tool to get the desired results.
