ACV (Annual Contract Value) is a key metric used in SaaS (Software as a Service) to measure the annualized value of a customer’s contract. ACV represents the total value of a customer’s contract, divided by the number of years in the contract term.
To calculate ACV, you need to know the total value of a customer’s contract over the course of a year. This typically includes recurring charges, such as subscription fees, as well as any one-time charges for additional services or features. To calculate ACV, you would divide this total value by the number of years in the contract term.
For example, if a customer signs a two-year contract for $24,000, the ACV would be calculated as follows:
ACV = $24,000 / 2 = $12,000 per year
This means that the customer’s contract is worth $12,000 per year in annualized revenue for the SaaS company.
It’s important to note that ACV is typically used for subscription-based SaaS models, where customers pay a recurring fee over a set period of time. For other types of SaaS models, such as usage-based or transactional pricing, different metrics may be used to measure revenue.
Here are the steps to calculate Annual Contract Value (ACV):
- Determine the total value of the customer’s contract: This includes all recurring charges and any one-time charges for additional services or features. For example, if a customer signs up for a two-year contract that includes a $2,000 setup fee and a monthly subscription fee of $100, the total value of the contract would be $4,400 ($2,000 + ($100 x 24 months)).
- Determine the number of years in the contract term: This is the length of the customer’s contract. In the example above, the contract term is two years.
- Divide the total contract value by the number of years in the contract term: This will give you the Annual Contract Value. Using the example above, the calculation would be: $4,400 / 2 years = $2,200 per year.
- Round the ACV to an appropriate level of precision: Depending on your needs, you may want to round the ACV to the nearest dollar or to a certain decimal place.
By following these steps, you can calculate the Annual Contract Value for any SaaS customer contract.