What is ACV and How to Calculate It For SaaS ?
For enterprise or SaaS businesses with a subscription-based pricing model, Annual contract value (ACV) is a standalone metric that measures the total revenue earned from a customer over 12 months.
Measuring this KPI helps sales reps identify the customers to retain and discuss upsells or extensions. Identifying ACV can also enable business leaders to measure the value of deals closed by sales reps and who’s bringing the Lion share of revenue into the company.
There’s a lot more to unveil about ACV, and in this guide, you will get to know its simple definition, how to calculate it, plus industry benchmarks to measure against.
What is ACV in Sales ?
According to Hubspot, “ACV, or annual contract value, is the total amount of revenue a contract has for a year”. This metric is calculated by SaaS companies since it revolves around average annual contracts.
Some of the earnings that make up a part of ACV includes monthly subscriptions, consultation fees, and multi-year contracts. But it excludes one-time transactions such as service implementation fees.
While ACV can serve as a stand-alone metric to analyze revenue earned in 12 months, it’s used together with other SaaS metrics such as opportunity-to-close to evaluate business growth.
For what it stands for, we can equally say that ACV could lend some data for sales forecasting. But we can’t forget that it enforces each rep’s revenue contribution especially since you can match an account to the sales rep that closed the deal.
How to Calculate ACV
To identify the ACV for one account, you have to divide the total contract value by the contract length. For instance, if a sales rep signs a customer on a 2-year contract for $20,000, then the ACV for that account is $10, 000, assuming the transaction is made annually.
But for small SaaS businesses, subscription terms could be monthly or quarterly. In such cases, the monthly revenue has to be added up and multiplied by 12 months to come up with the ACV. So, here’s what we mean: let’s assume that SalesDeck monthly plan costs $500 and you subscribe for 12 months, our ACV would be $6,000.
Also, for SaaS companies, there’s an obsession with the benchmark for metrics since it’s the only way to know if the company is underperforming. This is why we dug deep to uncover the ideal ACV for SaaS businesses
What is a Typical SaaS ACV?
The only data source we can provide comes from the Pacific Crest 2016 SaaS Survey uncovered an average ACV of $21,000 from 400 SaaS companies. The result enforces that 26% of the participants reported $5,000 in ACV while just 13% returned above $100,000.
The survey should be taken with a pinch of salt since most SaaS businesses have different pricing models. Hence, if the MRR from your highest plan is $200, $5,000 would be a big stretch unless you factor in add-ons.
Is ACV the Same as ARR?
No, it isn’t. ACV clamps down on the contract value of one account while ARR calculates the revenue return of all contracts. As you can see, ACV is a subset of ARR. While all companies calculate ARR as a yardstick to judge business growth and performance, ACV is a metric that’s suitable for subscription-based companies like SaaS.
Can ACV Be Improved?
Not the easiest task, since the simple solution would be increasing your price point. But there’s always a possibility that this might scare customers especially if the value they’re getting doesn’t match the price quoted.
For this reason, we recommend offering professional services as one of the best forms of upselling.
For example, at SalesDeck we offer sales training programs as a means of helping businesses get the most from our tools and sales activities.
Some of the benefits our SalesDeck users enjoy include ramping up new reps faster and increasing sales readiness. We offer this and many more features that help you get the most from sales via the Early Adopter Program. Fortunately, you can grab a spot in the program and transform virtual selling into your business.