Annual Contract Value (ACV) is the average annualized value of all customer contracts. Put differently, ACV is a company’s average customer ARR. ACV is the most common and important metric for describing the size of contract a SaaS business sells.
ACV dictates business strategy because it’s directly correlated to how much a company can spend to service a customer. If ACV is $10k and a company wants a 1:1 New Sales ARR / S&M ratio and 70% gross margins (both good SaaS benchmarks), they can allocate $10k to acquiring a new customer and $3k to servicing that customer each year. As ACV grows, a company has more money per customer to allocate to sales, marketing, and customer success, but is also at bigger risk of big plan misses of a small handful of large contracts that don’t close or churn.
ACV is often broken into two components:
Breaking down these two segments can be helpful to understand sales and customer success performance, respectively.