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Average Contract Value (ACV) is a key performance metric used to measure the average annualised revenue earned from a single customer contract. It is especially significant in SaaS and subscription-based businesses, as it helps assess contract quality, pricing strategy, and overall customer value. ACV offers insights into revenue predictability and supports more accurate growth forecasting.
ACV quantifies the value of customer contracts over a standard period, usually one year. The calculation helps businesses compare customer segments and pricing tiers.
Formula:
ACV = Total Contract Value ÷ Number of Years
For example, if a client signs a ₹15 lakh contract for three years, the ACV is:
₹15,00,000 ÷ 3 = ₹5,00,000 per year
While both ACV and TCV measure deal worth, ACV focuses on annualised value, whereas TCV includes the total value of the contract over its entire duration, including one-time fees and renewals.
For instance, if a three-year contract includes a ₹1 lakh setup charge and ₹4 lakh annual fees, the TCV is ₹13 lakh, while ACV remains ₹4 lakh.
ACV is essential for financial planning, pricing optimisation, and customer segmentation. It allows businesses to:
Forecast predictable revenue in recurring models.
Identify high-value customers for upselling or retention.
Evaluate pricing effectiveness and market positioning.
Track growth performance across regions, industries, or deal sizes.
By focusing on ACV, companies can align marketing, sales, and customer success teams to enhance long-term profitability.
Average deal size is the mean value of all closed deals in a given period. It provides insight into customer purchasing behaviour and complements ACV by showing how transaction volume relates to contract length.
If a company closes ten contracts worth a total of ₹1 crore in a year, the average deal size equals ₹10 lakh per contract. Analysing deal size alongside ACV helps identify whether sales strategies are shifting toward larger, more strategic customers or smaller, short-term accounts.
| Metric | Definition | Formula | Key Insight |
|---|---|---|---|
ACV |
Annualised contract value |
Total Contract Value ÷ Duration (Years) |
Measures yearly contract revenue |
Average Deal Size |
Average value of closed deals |
Total Deal Value ÷ Number of Deals |
Indicates sales team effectiveness |
ARPC (Average Revenue per Customer) |
Revenue generated per customer |
Total Revenue ÷ Number of Customers |
Evaluates profitability per user |
This comparison helps teams understand the relationship between deal structure, customer behaviour, and business scalability.
ARPC helps determine the revenue contribution of each customer within a given period:
ARPC = Total Revenue ÷ Total Customers
For example, if a SaaS firm earns ₹1 crore from 100 customers, ARPC = ₹1,00,000. Tracking ARPC alongside ACV highlights upselling effectiveness, cross-selling opportunities, and overall profitability per user.
SaaS Businesses: Focus on smaller, recurring contracts with predictable renewals. ACV helps analyse pricing tiers and churn impact.
Enterprise Sales: Involves larger, multi-year contracts that can skew ACV upward. However, TCV becomes equally critical for budgeting and forecasting.
B2B Context: ACV allows for comparing long-term customer value and lifetime contribution beyond initial acquisition.
ACV provides an annualised view of customer contract value, suitable for SaaS and subscription models.
It helps benchmark performance, forecast revenue, and plan marketing and sales strategies effectively.
Comparing ACV with TCV, ARPC, and average deal size gives a well-rounded perspective on profitability and pricing success.
Tracking ACV consistently helps businesses monitor revenue trends and customer lifetime value.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
ACV in SaaS refers to the average annual revenue a company earns per subscription contract, allowing for effective tracking of recurring income and customer growth trends.
While both indicate recurring revenue, ACV represents the average annual value of a single contract, whereas ARR aggregates the annualised value of all recurring contracts across the customer base.
For SaaS companies, ACV signifies the standardised yearly worth of each customer contract, offering a consistent measure of performance for revenue forecasting and pricing evaluation.
Add the total value of all contracts and divide by their collective duration in years. This provides the average annual contract value across the customer base.
No. ACV is the annualised portion of the contract value, while deal size may refer to the entire transaction value or TCV, including one-time charges.
Typically, ACV excludes one-time setup or onboarding fees unless those costs recur annually. Setup charges are usually accounted for in TCV.
ACV enables sales teams to understand account value, evaluate pricing tiers, and identify potential growth opportunities.
Businesses can increase ACV through upselling, adding premium features, offering bundled packages, and targeting enterprise-level clients with long-term commitments.
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Posted on 19 Dec
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