Average contract value (ACV) is the average revenue that a business earns per customer contract. While ACV is measured over a specific period of time, it’s most often used in the context of annually measured value and conflated with the term annual contract value — both terms mean roughly the same thing, but average contract value can apply over any time period whereas annual contract value applies annually.
ACV is particularly relevant for SaaS businesses because it can easily be applied to subscription-based operating models. If, for example, a customer signs up to a three-year subscription under contract for $35,000, the ACV for this contract would be the sum of $35,000 / 3 — or $11,666.66.
Although ACV isn’t the most useful metric on its own, it becomes an important figure for informing key business decisions such as sales, marketing, and pricing strategies when combined with other sales KPIs.
ACV and annual recurring revenue (ARR) are often confused with one another because they are similar. While ARR measures the value of recurring revenue at a single point in time, however, ACV normalizes them across a fixed time, usually one or more years.