Annual Contract Value (ACV)
Definition
Annual contract value (ACV) is the average annualized revenue per customer contract, normalized to a one-year period. ACV is used primarily by B2B SaaS companies to measure deal size, compare sales efficiency across segments, and benchmark against industry medians for enterprise versus SMB deals.
Formula
Overview
Annual contract value (ACV) normalizes contracts of varying lengths into a consistent annual figure. A three-year contract worth $120,000 has an ACV of $40,000. This normalization lets sales teams and investors compare deal sizes apples-to-apples regardless of contract duration.
ACV is distinct from ARR. ARR measures total recurring revenue across all customers, while ACV focuses on the average value of individual contracts. A company can have high ARR but low ACV (many small deals) or low ARR but high ACV (a few large enterprise contracts).
Tracking ACV trends over time reveals whether your sales motion is moving upmarket. Increasing ACV often correlates with longer sales cycles but higher gross margins and lower churn, a tradeoff that most investors view favorably at the growth stage.
Example
A startup signs a 2-year contract worth $72,000. The ACV is $72,000 ÷ 2 = $36,000.
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