Annual Contract Value

The average annualized revenue generated by a single customer contract, excluding one-time fees.

Annual Contract Value (ACV) is a key performance metric used primarily by Software-as-a-Service (SaaS) and other subscription-based businesses. It measures the average annualized revenue generated by a single customer contract over its active term. To ensure an accurate representation of recurring business, the calculation typically excludes one-time fees such as setup, onboarding, training, or professional services. Investors analyze ACV to understand the typical deal size a company secures and to track its sales trajectory. For instance, a rising ACV over several quarters often signals that a company is successfully moving upmarket to win larger enterprise clients or effectively upselling additional features to existing customers. Conversely, a declining ACV might indicate that the company is targeting smaller customers or facing pricing pressure. When evaluating a subscription business, ACV should not be viewed in isolation. It is most useful when paired with Customer Acquisition Cost (CAC) and customer churn rates. A low ACV can still support a highly profitable business model if the cost to acquire those customers is minimal and the sales cycle is short. Conversely, a high ACV typically justifies a longer, more expensive enterprise sales process but requires strong customer retention to remain profitable.

Company A signs a 3-year contract with an enterprise customer for a total value of $360,000. This total includes $300,000 in recurring software subscription fees and a $60,000 one-time implementation fee. To find the ACV, we exclude the $60,000 one-time fee, leaving $300,000 in recurring value. We then divide this by the 3-year contract term: $300,000 / 3 = $100,000 per year.