Annual Contract Value (ACV)

ACV decides how you can afford to sell. A product with an ACV of €1,200 cannot carry a sales call, a demo and a custom onboarding, because the cost of winning the customer would eat the first year's revenue. It has to sell itself through a self-serve motion. A product with an ACV of €40,000 can fund a salesperson and a proper implementation.

• Calculate ACV per segment, since small and large customers rarely behave alike.
• Compare it with customer acquisition cost to see whether a segment pays back.
• Report the median as well as the average, because one very large contract can distort the average.
• Watch the trend. A rising ACV usually means the business is moving upmarket, deliberately or not.

ACV puts every contract on the same one-year footing. The formula is the total contract value divided by the contract length in years. A three-year deal worth €72,000 has an ACV of €24,000. A one-year deal worth €30,000 has an ACV of €30,000. Looked at by headline size, the three-year deal wins. Looked at by ACV, it is the smaller customer.

Companies differ on whether one-off fees, such as set-up or training, count towards ACV. Pick a rule, write it down and apply it to every deal.

Quoting total contract value in updates, which makes multi-year deals look larger than they are. Mixing monthly and annual figures. Ignoring discounts given to win a longer term, which lower ACV without anyone noticing.

• Total contract value is the whole deal across its full length.
• ARR adds up the recurring value of every active customer. ACV describes one contract, or the average across contracts.
• ARPU is revenue per user, not per contract.