What is annual contract value?
Annual contract value metric measures the amount a customer contract is worth to your company in one year. ACV metric is usually used by SaaS companies that sell subscription-based products.
How to calculate annual contract value?
To calculate the annual contract value, divide the ‘total contract value’ (TCV) by the ‘total years’ in the contract.
Formula for calculating annual contract value
Real-life example of annual contract value
Look at this example to understand annual contract value:
You have a customer with a total contract value (TCV) of $100,000 for 5 years. Then, your annual contract value (ACV) will be: 100,000/5 = $20,000
What’s an average annual contract value? (benchmark)
Subscription businesses can be thriving with either a high or low annual contract value, as, the significance of ACV is determined by other metrics such as your churn rate and acquisition cost. It is not sustainable if the annual contract value does not offset the cost of acquiring the customer (CAC).
You should set a benchmark for yourself by measuring and tracking what ACV values make sense for your product, acquisition cost, market, and customer base.
According to a Pacific Crest survey of SaaS companies, the median ACV was $21K, with 26% of respondents below $5K and 13% above $100K.
A survey by RJMetrics also found – the average ACV for B2C companies (like Netflix or FabFitFun) was $100, while the average for B2B companies (like Salesforce or HubSpot) was $1,080.
You can have a low ACV and still be a large, successful company like Netflix.
Ways to increase your annual contract value
- Include upselling and cross-selling strategies: You can use Upselling and cross-selling strategies to increase the average value of a customer transaction while offering them better solutions. For instance, one plan might cost $99/mo but if users want additional feature sets they can upgrade to a plan that costs $199/mo.
- Consider increasing subscription prices: Increasing your overall pricing will ultimately increase the annual contract value. However, you should study your customers before doing so as, they might not be ready for a price increase and you can rather lose your customer base.
- Focus on your customers: If you don't satisfy your customers, they will not feel confident about upgrading or paying more in years to come. By focusing on your customers and providing them with a great experience, you’ll have better odds of future upsells and expansion.