Revenue metrics are useful only if they help you make smart decisions. Two important – but often conflated – metrics for software-as-a-service (SaaS) businesses are ACV and ARR. While these metrics are related, they answer different questions. If you don’t understand how they differ, your forecasts, targets, and strategy can suffer.

Below, we’ll explain the difference between ACV and ARR, when to use each one, and how to look at them together to get the most information for your business.

What’s in this article?

• What is ACV?
  
• What is ARR?
  
• How do ACV and ARR differ?
  
• When should businesses prioritise ACV over ARR?
  
• When is ARR a more relevant metric than ACV?
  

What is ACV?

Annual contract value (ACV) tells you the average revenue you’re bringing in per customer per year. To calculate it, take the total annual contract value of all your customers and divide it by the number of customers.

Example: You have two clients. One signs a deal for £60,000 a year. The other signs a deal for £40,000 a year.

ACV = (£60,000 + £40,000) ÷ 2 = £50,000

Companies typically focus on recurring revenue when they calculate ACV, which means they’ll leave out one-time charges such as setup fees and overage charges. But each business can make its own decisions about what it wants ACV to include. What matters is that your team agrees on how this is calculated so you’re using the same numbers over time.

Why it matters

ACV gives you a clear view of customer value by showing you how much revenue a typical customer brings in each year. By tracking changes over time, you can better assess your performance. If your ACV is growing, that might mean you’re winning larger deals or moving into higher-value segments. If it’s shrinking, that could be a sign you’re signing smaller contracts or discounting more aggressively.

ACV affects important decisions, too. A higher ACV can justify bigger investments in sales, onboarding, or customer success. You can use ACV to better align acquisition cost with customer value.

What is ARR?

Annual recurring revenue (ARR) is the total subscription revenue you expect to earn in a year from all your active customers. It’s your revenue run rate: it tells you how much your current subscriptions would bring in over the next 12 months if nothing changed.

Example: Your recurring subscription revenue in January is £50,000.

ARR = £50,000 x 12 = £600,000

ARR includes only recurring revenue, not one-off charges.

Why it matters

ARR is the clearest picture of how much subscription revenue your business is generating and how reliably it’s growing from year to year. Investors, boards, and operators use ARR to track progress, forecast future revenue, and gauge company health. If ARR is rising, that’s a sign your recurring revenue engine is working. If it’s flat or falling, that means churn or contraction is dragging you down.

Because ARR filters out one-time charges, it offers a cleaner view of durable, repeatable revenue. It also helps you make decisions about how fast you can hire, how much you can spend on growth, and how confident you can be in the next quarter.

ARR is tied closely to valuation, especially in SaaS. A strong ARR trajectory shows momentum and increases your company’s worth.

How do ACV and ARR differ?

At a glance, ACV and ARR seem similar: both relate to customer revenue and both are measured annually. But they aren’t interchangeable. Here are the main differences between ACV and ARR.

Scope

ACV is a deal-level metric. It reflects the average annual value of a customer contract. It’s used to evaluate deals and understand customer value.

ARR is a company-wide metric. It captures the total recurring revenue your business expects to earn each year from all active subscriptions.

Standardisation

ARR is tightly defined and includes only recurring revenue streams. This makes ARR a clean, standardised number for tracking growth over time or benchmarking performance across companies.

ACV is more flexible by design. Teams usually calculate it based on recurring subscription revenue alone, but some also include one-time charges such as setup or implementation fees (especially in the first year of a multi-year contract). Different companies will define it in slightly different ways.

Typical use

ACV is the language of sales, success, and account teams. It’s used to size deals, compare segments, and structure compensation. If the sales team increases ACV, that helps estimate the return on investment of acquisition costs or justify dedicated support.

ARR is the language of leadership, finance, and investors. It’s the headline metric for understanding how much recurring revenue you receive, how it’s trending, and how predictable your income is. ARR growth targets are often central to planning.

Business implications

ACV tells you how your sales team is performing at the deal level: whether they’re winning larger contracts, whether you’re moving upmarket, and whether you’re expanding accounts effectively.

ARR shows how your contracts add up and whether your revenue engine is growing fast enough to meet your goals.

Together, ACV and ARR can help you answer questions such as the following:

• Are we winning bigger deals over time?

• Is our growth coming from volume or contract size?

• Are we matching our go-to-market strategy with the right customer segments?

When should businesses prioritise ACV over ARR?

Both ACV and ARR matter. But there are moments when ACV gives you sharper insight, especially when you’re making decisions about sales strategy, customer segmentation, or the economics of growth.

In general, ACV helps you determine whether you’re earning enough per customer to justify the cost of acquiring them. That means you can use ACV to:

• Evaluate whether your pricing supports your go-to-market motion

• Adjust your acquisition budget relative to revenue per customer

• Make informed choices about sales head count and structure

Here are some scenarios when you’ll want to focus more on ACV.

Selling big, complex deals

If your business depends on winning large enterprise contracts, ACV is your most useful metric. In these models, each deal brings in substantial annual revenue. These deals often justify high-touch sales motions such as field reps, solution engineers, and on-site pilots, because the payoff per customer is substantial. A six-figure ACV deal can support months of outreach.

Moving upmarket

ACV is a direct reflection of deal size, and deal size is a reflection of how your sales strategy is working. For example, imagine your company started out selling subscriptions to small businesses for £5,000. If your goal is to sell to mid-market or enterprise clients, you want your ACV to rise to £20,000, £50,000, or even £100,000. You can use ACV to track progress against upmarket goals and set sales quotas based on value rather than volume.

Segmenting your product or customer base

If you offer multiple pricing tiers or serve a wide range of customer types, you can calculate ACV to compare segments. For example, the US market might have £80,000 ACV, while the UK market might have £30,000 ACV. This data can shape decisions across your organisation: marketing teams can focus their campaigns on high-ACV segments, sales teams can adjust qualification criteria or staffing, and product teams can consider where to invest in features or support. ACV helps you prioritise the segments that deliver the most annual revenue per customer and decide where to focus next.

Tuning your unit economics

ACV is a core metric for figuring out whether or not your business model works. For example, if you spend £20,000 to acquire a new customer and your ACV is £10,000, that’s a two-year payback period – assuming strong retention. But if your ACV is £30,000, your payback is under a year, which is much healthier.

In models with long sales cycles and high customer acquisition costs, such as enterprise SaaS, high ACV is what makes the maths work.

When is ARR a more relevant metric than ACV?

While ACV helps you understand the average value of individual deals, ARR gives you a better view of the company’s overall growth trajectory and financial health.

Here are some cases when ARR becomes the more relevant lens.

Business scale and growth

CEOs, CFOs, and investors often default to ARR when they discuss performance. If your company’s ARR increased from £2 million to £4 million in a year, that’s a clear signal of progress.

ACV doesn’t capture this growth as effectively. You could have a high ACV but only a few active customers, which tells a very different story from a business with a broader customer base and expanding ARR.

ARR is the preferred metric for executive conversations and long-term goal-setting. Use ARR when you’re tracking year-on-year growth and market traction.

Budgeting, forecasting, and planning

ARR allows finance teams to anchor planning around stable, recurring revenue. If you’re entering the year with £5 million ARR and expect £3 million in new recurring revenue, that £8 million run rate becomes the basis for your head count, hiring plan, and discretionary budget.

ACV can help you see your average deal size and sales productivity, but it won’t tell you how much revenue is already committed or what your baseline financial position looks like.

ARR is a more important metric for revenue forecasting, cash flow modelling, and capacity planning across functions.

External reporting and valuation

ARR is the metric the outside world expects. Investors typically value SaaS companies based on ARR, and it’s one of the most important numbers in pitch decks, investor updates, and acquisition discussions. It’s also the most portable metric across benchmarks. When a founder says, “We’ve hit £3 million ARR,” that signals product-market fit and an inflection point in the company’s maturity.

ACV might be used to clarify your pricing model or market segment, but investors tend to care more about ARR and its growth rate.

Retention and expansion

ARR shows what you’ve kept and how that base is expanding. If a customer leaves, your ARR decreases. If a customer upgrades, your ARR increases. This makes ARR important for monitoring revenue retention, expansion revenue, churn impact, and customer health across cohorts.

High-volume, low-ACV business models

Some businesses don’t aim for high ACV. Instead, they succeed through volume. This applies to many self-serve B2B tools, consumer SaaS platforms, and developer-first products. In these cases, individual contract values might be small, but scale is the strategy. For example, a subscription-based company with 5,000 customers who each pay £200 per month might have an ACV of only £2,400, but its ARR would be £12 million.

In these businesses, ACV is too narrow to guide decision-making. ARR shows whether adoption is increasing, how effective your growth motion is, and what scale you’ve actually achieved. You might even see ACV decrease as you expand into broader markets, but as long as ARR continues to rise, the business is growing.