What is Average Contract Value (ACV)?
Average Contract Value (ACV) is the average annualized value of customer contracts. It’s a core sales metric used to understand deal size, segment performance, and how pricing and packaging decisions affect revenue.
How to Calculate ACV
ACV is typically calculated as:
ACV = Total Annual Contract Value of New Deals ÷ Number of New Deals
If you sell multi-year contracts, teams often annualize them (e.g., a $300k 3-year contract has $100k ACV). Some teams exclude one-time fees; others track a separate metric for services.
ACV vs ARR vs TCV
- ACV: annualized contract value (useful for comparing deal sizes consistently)
- ARR: annual recurring revenue, often aligned to recurring subscription components
- TCV: total contract value across the full contract term (includes multi-year totals)
Why ACV Matters
- Segmentation: SMB vs enterprise motions often differ primarily by ACV.
- Sales efficiency: Higher ACV can justify longer sales cycles and higher CAC.
- Capacity planning: ACV influences quota setting and expected deal volume.
- Retention and expansion: Higher ACV customers can drive stronger NRR if expansion paths exist.
How to Increase ACV
- Packaging: create tiers and bundles that map to customer maturity and outcomes.
- Value-based pricing: price to business value rather than feature counts.
- Multi-year incentives: encourage longer terms with appropriate concessions.
- Land and expand: design clear expansion levers (seats, usage, add-ons).
- ICP refinement: target segments that can realize higher ROI and pay more.
How AI Helps With ACV Growth
AI can identify which customer profiles expand the most, which use cases correlate with higher contract values, and which objections block premium packaging—supporting better targeting and deal strategy.
help_outlineFrequently Asked Questions
Should ACV include one-time fees or services revenue?
It depends on how you use the metric. Many SaaS teams keep ACV focused on subscription value and track one-time fees separately to avoid overstating recurring economics. If services are material, report both subscription ACV and total ACV.
What’s the difference between ACV and ARR per customer?
They’re related, but ARR per customer usually reflects your active installed base, while ACV is often reported on new bookings (new deals) and can include multi-year annualization and packaging changes.
Why does ACV increase while win rate decreases?
Moving upmarket typically raises ACV but can lower win rate and lengthen sales cycles due to higher complexity. Segment performance by deal size and ICP fit to ensure the tradeoff is intentional and sustainable.
How should we segment ACV reporting?
At minimum: by customer size/segment, acquisition channel, region, and product/plan. This helps you see which motions produce larger deals and which ones are constrained by pricing or positioning.