Companies benefit from various metrics to measure their marketing performances. Some metrics might seem useless on their own, but they become meaningful with other data. Annual contract value (ACV) is one of them. So, what is the annual contract value? Why is it essential for companies?

What Is Annual Contract Value?

The annual contract value is the annual value of all subscription revenue from a contracted customer. While it may not seem like an essential metric by itself, it’s adequate for understanding a company’s finances compared to other sales metrics such as total contract value (TCV) and annual recurring revenue (ARR).

Annual contract value measures the value of a customer based on yearly contracts, subscriptions, and consulting services. Additionally, it includes the annual value of a multi-year contract. This way, businesses can evaluate the value of their customers and plan forward-looking growth.

Why Is Annual Contract Value Used? 

annual contract value

ACV is mainly used by software companies’ sales, marketing, and management professionals, but it is not a very useful metric alone. You can obtain critical information that helps shape your work decisions by understanding your strategy through ACV and comparing the outputs to other metrics.

Knowing what your company is aiming for is vital for making accurate comparisons. In addition, measuring which ACV values are more meaningful for your products, market, and customer base will help you understand how to invest in marketing and sales teams besides creating their strategies.

How Is It Calculated?

One of the main reasons why companies measure ACV is to compare it with metrics such as ARR or TCV. There’s no standard formula for calculating ACV. It’s because some companies include start-up fees such as setup and joining fees in their calculations, while others don’t. Usually, ACV calculation is as follows:

ACV= Total revenue from subscription contracts / total years in contract

Your ACV value might be high or low, regardless of the company’s size. For example, a big company can prefer keeping the ACV low while having more customers to grow. 

Why Is It Important for Companies?

annual contract value

ACV tracking allows you to develop your marketing strategy and optimize it to accelerate company growth. Mainly it’s beneficial for companies based on subscriptions instead of one-time purchases.

ACV is an advantageous measurement for strategic work decisions when implemented with other metrics. That allows you to make better marketing and sales decisions. By focusing on customers that’ll add value to the company and investing in them, you will contribute to both your income and the company’s growth.

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