Definition

Annual Contract Value (ACV) is a sales metric that represents the average yearly revenue generated from a customer contract, normalized to a 12-month period regardless of the total contract duration.

What is Annual Contract Value (ACV)?

Annual Contract Value emerged as subscription and SaaS business models gained prominence in the early 2000s. Organizations needed standardized metrics to compare contracts with different terms and payment structures. ACV provided a solution by normalizing all contracts to an annual value, enabling more consistent reporting and forecasting.

Today, ACV has become a foundational SaaS metric used by sales teams, finance departments, and investors to evaluate business performance. Modern revenue operations platforms like Saber help companies track ACV trends across customer segments, providing insights that inform pricing strategies, sales compensation plans, and growth forecasts.

How Annual Contract Value Works

Annual Contract Value calculations standardize contract values to a 12-month equivalent, making diverse agreements comparable. The process typically follows these principles:

• Basic Calculation: For a one-year contract, ACV equals the total contract value. For multi-year deals, ACV is calculated by dividing the total contract value by the number of years.

• One-Time Fees: Implementation, setup, or onboarding fees are typically excluded from ACV calculations since they represent non-recurring revenue.

• Subscription Components: Recurring charges such as license fees, maintenance fees, and support costs are included in ACV calculations.

• Variable Components: Usage-based fees may be estimated based on expected consumption levels or historical data when calculating ACV.

• Discounts and Incentives: Any contractual discounts are factored into the ACV calculation to reflect actual revenue recognition.

Example of Annual Contract Value

A B2B software company signs a three-year contract with a client for their enterprise solution. The agreement includes $90,000 in annual subscription fees, a one-time implementation fee of $15,000, and annual premium support for $18,000 per year. To calculate ACV, they would include only the recurring revenue components: $90,000 (subscription) + $18,000 (support) = $108,000 ACV. The $15,000 implementation fee is excluded as it's a one-time charge. This ACV figure allows the company to compare this deal with others of different durations and structures.

Why Annual Contract Value Matters in B2B Sales

Annual Contract Value is critical in B2B sales because it enables meaningful comparison of different contract types, provides a standardized metric for forecasting revenue growth, and helps assess customer acquisition economics. Sales organizations use ACV to evaluate deal quality, set quotas, structure compensation plans, and identify upsell opportunities. Investors and executives rely on ACV trends to gauge business health, particularly when combined with metrics like Customer Acquisition Cost and Customer Lifetime Value.