What is ACV (Annual Contract Value)?
ACV (Annual Contract Value) represents the average annualized revenue from a single customer contract.
Unlike ARR (which shows total company revenue), ACV is a deal-level metric that reflects the value of individual customer relationships.
ACV Formula:
ACV = (Total Contract Value) / (Contract Length in Years)
Example:
- 3-year contract worth $60,000
- ACV = $60,000 / 3 = $20,000
ACV vs. ARR
| Metric | What It Measures | Scope | Primary Use |
|---|---|---|---|
| **ACV** | Value per customer contract | Individual deals | Deal evaluation, pricing strategy |
| **ARR** | Total recurring company revenue | Entire business | Company valuation, forecasting |
Key Difference:
- ACV zooms in on individual deals
- ARR shows the big picture of company revenue
ACV Benchmarks by Segment
By Company Size
| Segment | Typical ACV Range | Deal Characteristics |
|---|---|---|
| SMB (Small Business) | $3K - $15K | Short sales cycle, self-service or light touch |
| Mid-Market | $15K - $75K | 2-3 month sales cycle, AE-led |
| Enterprise | $75K - $500K+ | 6-12 month sales cycle, multi-stakeholder |
By Deal Type
| Deal Type | ACV Range | Sales Model |
|---|---|---|
| Self-serve PLG | $1K - $10K | Product-led, no sales touch |
| Transactional | $10K - $30K | Inside sales, fast cycle |
| Strategic | $30K - $100K | Field sales, AE-led |
| Enterprise | $100K - $1M+ | Complex sales, team-based |
Why ACV Matters
1. Pricing Strategy
ACV helps validate pricing models.
Analysis Questions:
- What ACV segments are growing fastest?
- Which ACV ranges have highest win rates?
- Are customers upgrading (increasing ACV) over time?
2. Sales Compensation
ACV determines deal economics for reps.
Commission Planning:
- Higher ACV = higher commission per deal
- Higher ACV = longer sales cycle = fewer deals per rep
- Commission structure should align with ACV targets
3. Resource Allocation
ACV informs go-to-market investment.
Example:
- $10K ACV deals → Inside sales model makes sense
- $150K ACV deals → Field sales model required
4. Forecasting
Historical ACV by segment enables accurate pipeline forecasting.
Forecast Formula:
Weighted Pipeline = (Deals in Stage) × (Win Rate) × (Average ACV)
Calculating ACV
Basic Formula
ACV = Total Contract Value / Contract Years
Examples:
- $30K paid annually for 1 year → ACV = $30K
- $50K paid monthly for 2 years → ACV = $25K
- $120K paid upfront for 3 years → ACV = $40K
Weighted ACV (Across Customer Base)
Average ACV = Total ARR / Total Customers
Example:
- $10M ARR across 500 customers
- Average ACV = $10M / 500 = $20K
New Business ACV vs. Expansion ACV
Track separately for insights:
New Business ACV:
ACV from net-new customers
Expansion ACV:
Additional ACV from existing customers (upsells, cross-sells)
Strong companies see expansion ACV grow over time.
ACV-Related Metrics
ACV Distribution
Understanding your ACV spread informs strategy.
Healthy Distribution Example:
- < $10K: 20% of customers (volume segment)
- $10K-$50K: 60% of customers (core segment)
- > $50K: 20% of customers (strategic segment)
ACV Growth Rate
ACV Growth = (Current ACV - Original ACV) / Original ACV
Positive ACV growth indicates customers expanding over time (net revenue retention).
ACV by Cohort
Track ACV by customer acquisition year to see if newer cohorts have different ACV profiles.
ACV Optimization
Increasing ACV
Pricing Strategies:
- Tiered pricing (encouraging higher tiers)
- Annual payment discounts (higher upfront commitment)
- Multi-year discounts (longer commitment, higher total value)
- Bundle premium features at higher ACV tiers
- Create enterprise packages with premium services
- Add implementation/training to higher ACV packages
Targeting Right ACV
ICP Alignment:
- Focus prospecting on ideal ACV range
- Qualify out opportunities below minimum ACV threshold
- Invest proportionally to ACV potential
Common ACV Mistakes
Confusing ACV with ARR:
ACV is per-contract; ARR is total company revenue. Different metrics for different purposes.
Ignoring Contract Length:
$60K upfront for 3 years ≠ $60K annual. Always normalize to annual value.
Focusing Only on High ACV:
Volume of smaller ACV deals can equal fewer large deals. Diversification manages risk.
Not Tracking Expansion:
Original ACV vs. Current ACV shows expansion/churn dynamics.
Wrong ACV Expectations:
SMB strategy requires low ACV, high volume. Enterprise strategy requires high ACV, low volume.
Key Takeaways
- ACV is the annualized value of individual customer contracts
- Differs from ARR (total company revenue)
- SMB: $3K-$15K, Mid-Market: $15K-$75K, Enterprise: $75K-$500K+
- Informs pricing strategy, compensation, and resource allocation
- Track both new business ACV and expansion ACV
- Higher ACV typically correlates with longer sales cycles
- Optimize through pricing tiers, packaging, and multi-year deals
- Calculate: Total Contract Value / Contract Years
Related Terms
A/B Testing
Testing two versions of an email, subject line, or landing page to see which performs better.
ABC (Always Be Closing)
Traditional sales mindset focused solely on closing deals. Modern approach: Always Be Connecting.
ABM (Account-Based Marketing)
Marketing strategy treating individual accounts as markets. Highly personalized campaigns for high-value targets.
ABS (Account-Based Selling)
Sales approach targeting specific high-value accounts with personalized outreach. Inverts traditional funnel.
