ACV vs ARR

Annual Contract Value (ACV) and Annual Recurring Revenue (ARR) are closely related SaaS metrics that measure contract value in different ways. ACV represents the average annualized revenue per customer contract, normalizing contracts of varying lengths and payment terms to a single annual figure, typically excluding one-time fees and focusing on the recurring portion. ARR, on the other hand, measures the total value of recurring revenue components from all active subscriptions on an annualized basis, providing a comprehensive view of predictable annual revenue from the entire customer base rather than on a per-contract basis.

A SaaS company should focus on ACV when analyzing sales performance or evaluating changes in deal size over time. For instance, if a company notices their ACV increasing quarter over quarter, it indicates the sales team is successfully targeting larger clients or more effectively upselling existing customers. Conversely, the company would emphasize ARR when communicating with investors about overall business growth and stability, or when forecasting future revenue. If the same company loses a few large contracts but gains many smaller ones, their ACV might decrease while their ARR continues to grow—showing that while individual deal sizes are shrinking, the business is still expanding its recurring revenue base, which is ultimately more important for long-term company valuation.

Annual Contract Value

Annual Recurring Revenue

What is it?

Annual Contract Value (ACV) represents the normalised dollar amount an average customer contract is worth to your company over one year. Unlike other SaaS metrics such as Annual Recurring Revenue (ARR), there's less universal consensus on ACV's precise definition across the industry. Some companies include one-time charges like setup fees, implementation costs, or training in their ACV calculations, while others exclude these non-recurring elements to focus purely on the ongoing contractual commitment. This variability makes it essential for sales and finance teams to establish clear internal definitions and remain consistent in their calculations to ensure meaningful trend analysis and benchmarking. The metric serves as a crucial indicator of your company's market positioning, customer segmentation strategy, and overall business model effectiveness. ACV directly influences your go-to-market approach, sales team structure, customer success investments, and pricing strategy. Companies with higher ACVs typically employ different sales methodologies, longer sales cycles, and more comprehensive customer onboarding processes compared to those targeting lower ACV segments.

Annual Recurring Revenue (ARR) is a key financial metric representing the value of a business's repeatable, predictable subscription income normalized over a 12-month period. It quantifies the expected yearly revenue a subscription business, particularly those with contracts of a year or longer, can count on from its current customer base. The metric is calculated by annualizing all active, contractually committed subscriptions, excluding one-time fees, professional services, or variable usage charges. ARR is crucial for long-term forecasting, capital allocation, and business valuation, as it highlights the stability and scale of the subscription revenue stream.

Who is it for?

Chief Financial Officer

Chief Revenue Officer

Sales Manager

Chief Financial Officer

Chief Revenue Officer

Sales Manager

Business Intelligence Analyst

Formula

ƒ Sum(Value of all Customer Contracts for 1 year) / Count(# of Customers under Contract)

ƒ Sum(Recurring Revenue irrespective of billing interval expressed as an annual value)

Example

The calculation should include all customers currently under contract, regardless of their contract length. For multi-year agreements, annualise the total contract value by dividing by the contract term length. Ensure consistency in how you handle partial years, contract modifications, and expansion revenue to maintain accurate trending over time. Consider a scenario with 100 customers across different contract structures: 30 customers signed 3-year contracts valued at $90,000 total, equivalent to $30,000 per year 30 customers signed 2-year contracts valued at $80,000 total, equivalent to $40,000 per year 40 customers signed 1-year contracts valued at $50,000 total, equivalent to $50,000 per year Year 1 ACV Calculation: ((30,000 × 30) + (40,000 × 30) + (50,000 × 40)) ÷ 100 customers = $41,000 Year 2 ACV Calculation: ((30,000 × 30) + (40,000 × 30)) ÷ 60 customers = $35,000 Year 3 ACV Calculation: (30,000 × 30) ÷ 30 customers = $30,000 This example illustrates how ACV evolves as your customer cohorts mature and contracts expire. The declining ACV trend suggests the need for strong renewal strategies and potential upselling initiatives to maintain contract values over time.

If a customer subscribes to a service with a 1-year renewal agreement for $12,000, then Annual Recurring Revenue would be; ARR = $12,000 If a customer subscribes to a service for $10,000 (with no contract), then Annual Recurring Revenue would be; ARR = $0 If a customer subscribes to a service with a monthly renewal agreement for $1,000 per month, then Annual Recurring Revenue would be; ARR = $1,000 * 12 = $12,000

Published and updated dates

Date created: Oct 12, 2022

Latest update: Aug 15, 2025