Annual contract value (ACV) is a useful revenue metric for software-as-a-service (SaaS) and subscription businesses. Teams reference it in forecasts, pricing discussions, sales targets, and board presentations. But many rely on a loose definition of ACV that hides what the metric actually reveals about deal quality, customer mix, and long-term growth.

Below, we’ll explain how SaaS and subscription businesses calculate ACV. We’ll also go over how ACV differs from related metrics such as monthly recurring revenue (MRR), annual recurring revenue (ARR), and total contract value (TCV), and why those differences matter.

What’s in this article?

• What is ACV in SaaS?
  
• How do you calculate ACV and use it effectively?
  
• Why does ACV matter for SaaS and subscription businesses?
  
• How does annual contract value compare to MRR, ARR, and TCV?
  
• How does ACV affect pricing strategy, revenue forecasting, and growth planning?
  
• How do sales and marketing teams use ACV to evaluate performance?
  
• How can businesses use ACV to increase revenue and improve performance?
  

What is ACV in SaaS?

Annual contract value, or ACV, answers a simple question: how much revenue does a single customer contract generate in a year?

It takes the recurring portion of a contract and normalizes it to an annual figure, which makes it easier to compare deals of different sizes and lengths. Whether a customer signs for six months or three years, ACV places every contract on the same annual basis so teams can understand deal value at a glance.

How do you calculate ACV and use it effectively?

In SaaS accounting, ACV is calculated by dividing a contract’s total recurring value by the number of years it covers. So, a two-year subscription worth $200,000 in recurring fees, for example, would have an ACV of $100,000.

Companies typically exclude one-time charges, such as setup fees, onboarding, or custom implementation, because those inflate the first invoice without reflecting ongoing revenue.

ACV isn’t a standardized accounting metric, so definitions can vary by business. What matters is choosing a clear rule for what counts as recurring, applying it consistently across deals, and keeping that definition stable over time.

Why does ACV matter for SaaS and subscription businesses?

ACV matters because it shows the quality of revenue and the headline growth rate. It helps teams understand whether growth is coming from larger, more valuable contracts or from accumulating many smaller deals.

ACV also surfaces a shift in customer mix and pricing power. Changes in average contract value often signal who the product resonates with most and how much value different segments see in it.

Finally, ACV provides a solid foundation for financial planning. When teams understand what a typical customer contributes annually, they can forecast revenue more realistically and connect growth goals to actual customer behavior.

How does annual contract value compare to MRR, ARR, and TCV?

ACV is often discussed alongside other revenue metrics, but each one measures something distinct. It’s worth knowing the differences, so you can apply the right combination for your business.

Here are the specifics:

• ACV vs. MRR: ACV measures the annual value of an individual contract. Monthly recurring revenue (MRR) measures the total recurring revenue across all customers in a single month. MRR tracks short-term movement, while ACV explains deal size.

• ACV vs. ARR: ACV focuses on one customer at a time. Annual recurring revenue (ARR) reflects the total recurring revenue a business expects to generate in a year from all customers combined. ARR shows scale, and ACV focuses on one customer at a time.

• ACV vs. TCV: ACV converts the total into an annual figure, which enables contracts of different lengths to be fairly compared. Total contract value (TCV) captures the full value of a contract over its entire duration, sometimes including one-time fees.

How does ACV affect pricing strategy, revenue forecasting, and growth planning?

ACV is most useful when evaluating deal size, customer mix, and sales strategy without distorting contract length or billing timing. It connects pricing and packaging decisions directly to how revenue accumulates over time.

Here’s how ACV affects pricing strategy, revenue forecasting, and growth planning:

• Pricing strategy: ACV reflects what customers are willing to pay annually. When ACV rises after a pricing or packaging change, it’s a strong signal that the perceived value and price are lined up.

• Packaging and product focus: Patterns in ACV often reveal which parts of the product drive larger commitments. Teams often use these insights to focus product investment and refine packaging to increase annual deal value.

• Revenue forecasting: Knowing the average annual value per customer makes it easier to project revenue based on acquisition, retention plans, and expansion assumptions.

• Growth planning: ACV clarifies how the business is growing: through more customers, closing larger deals, or both. The distinction shapes hiring plans, sales motion, and long-term investment decisions.

How do sales and marketing teams use ACV to evaluate performance?

For go-to-market (GTM) teams, ACV shows meaningful revenue progress. It also reveals surface-level activity.

Here’s how:

• Sales performance: Sales teams track ACV to understand average deal size and whether they’re consistently closing higher-value contracts over time.

• Quota setting and incentives: Tying incentives to ACV encourages representatives to prioritize durable revenue over pure volume.

• Pipeline quality: A growing pipeline with declining ACV can indicate pricing pressure or a shift toward lower-value customers.

• Marketing channel effectiveness: Marketing teams analyze ACV by acquisition channel, segment, or campaign to see where high-value customers come from. These insights help refine targeting, positioning, and messaging so efforts attract customers who deliver stronger long-term value.

How can businesses use ACV to increase revenue and improve performance?

When used correctly, ACV can be a guide for practical improvement. Small shifts informed by ACV often compound into meaningful gains over time.

Here’s how you can use it to increase revenue and improve performance:

• Expand existing accounts: ACV shows where upsells, cross-sells, or usage-based expansions are already happening. Teams can formalize those patterns into clearer upgrade paths and account growth strategies.

• Move customers toward higher-value plans: When premium tiers consistently deliver more annual value, clearer differentiation and stronger return on investment (ROI) messaging can help customers justify larger commitments.

• Encourage longer commitments: Multiyear contracts can increase predictability and, in many cases, ACV. Incentives such as price protection or added service value can make multiyear commitments appealing without sacrificing annual value.

• Design for higher-value customers: ACV by segment shows which customers are worth deeper investment. Lining up product, support, and customer success around higher-ACV customers helps ensure resources are spent where they deliver the strongest long-term returns.

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