Financial Glossary
Annual Contract Value (ACV)
Annual contract value (ACV) is the normalized annual revenue attributed to a single customer contract, calculated by dividing total contract value by contract length in years. For a two-year $48,000 contract, ACV = $24,000 per year. ACV excludes one-time fees such as implementation or setup charges, focusing only on recurring revenue. It is the standard metric for sizing and comparing deals in SaaS and subscription businesses, used in sales performance reporting, quota-setting, and revenue forecasting. ACV differs from total contract value (TCV), which includes all fees over the full term, and from annual recurring revenue (ARR), which is the aggregate ACV across all active customers.
Problem & Application
A campground management SaaS company closes three deals in a quarter: a 1-year contract for $18,000 (ACV $18,000); a 2-year contract for $60,000 (ACV $30,000); and a 3-year contract with $90,000 in software fees plus $15,000 in one-time onboarding (ACV = $90,000 divided by 3 = $30,000; onboarding excluded). Total new ACV added this quarter = $78,000, representing the annualized run-rate increase to the company's ARR base. Sales reps are typically compensated on ACV rather than TCV to prevent gaming by selling artificially long contracts at steep discounts. Tracking ACV by customer segment (small independent campground versus multi-property operator) helps identify where pricing power and expansion opportunity are strongest.
In Short
ACV is a critical metric for understanding customer revenue on an annual basis, helping businesses forecast income and evaluate customer value effectively.