How to Calculate Average Contract Value (ACV)
Average Contract Value (ACV) measures the mean annual value of customer contracts. Learn the ACV formula, relationship to ARR, and how to use ACV for sales planning.
Average Contract Value (ACV) is the mean annualized revenue per customer contract, measuring the typical size of deals your sales team closes. It is calculated by dividing total contract value (normalized to annual amounts) by the number of contracts. ACV is a critical metric for SaaS and subscription businesses because it informs sales strategy, pricing decisions, and go-to-market investment - helping companies understand whether they're competing for small, high-volume deals or large, complex enterprise contracts.
ACV Formula
ACV = Total Annual Contract Value / Number of Contracts
For multi-year or non-annual contracts, normalize to annual value first:
ACV = Σ (Contract Value / Contract Years) / Number of Contracts
Step-by-Step Calculation
Step 1: Identify Contracts to Include
Define the contract population:
- New contracts closed in a period
- All active contracts as of a date
- Contracts within specific segments
Be clear about whether you're measuring new deal ACV or overall portfolio ACV.
Step 2: Normalize to Annual Value
Convert all contracts to annual equivalents:
| Contract Term | Annual Value |
|---|---|
| Monthly ($100/mo) | $1,200 |
| Annual ($10,000/yr) | $10,000 |
| 2-Year ($50,000 total) | $25,000 |
| 3-Year ($120,000 total) | $40,000 |
Step 3: Sum Annual Values
Total Annual Value = Σ (Normalized annual contract values)
Step 4: Divide by Contract Count
ACV = Total Annual Value / Number of Contracts
Example Calculation
New deal ACV for Q4:
| Customer | Contract | Term | Annual Value |
|---|---|---|---|
| Acme Corp | $60,000 | 2 years | $30,000 |
| Beta Inc | $24,000 | 1 year | $24,000 |
| Gamma LLC | $15,000 | 1 year | $15,000 |
| Delta Co | $90,000 | 3 years | $30,000 |
| Epsilon Ltd | $18,000 | 1 year | $18,000 |
Total Annual Value = $30,000 + $24,000 + $15,000 + $30,000 + $18,000 = $117,000
Number of Contracts = 5
ACV = $117,000 / 5 = $23,400
New deal ACV for Q4 is $23,400.
ACV Variations
New Business ACV
ACV of newly acquired customers:
New Business ACV = Total New Contract Annual Value / New Contracts
Indicates typical initial deal size.
Expansion ACV
ACV of upsells and expansions to existing customers:
Expansion ACV = Total Expansion Annual Value / Expansion Deals
Often differs significantly from new business ACV.
Total Customer ACV
Annual value across all products and expansions per customer:
Total Customer ACV = Customer's Total ARR / 1
Shows full customer relationship value, not just initial deal.
Median ACV
When deal sizes vary widely, median ACV may be more representative than mean:
Median ACV = Middle value when contracts are sorted by size
Median is less affected by outlier large or small deals.
ACV by Segment
ACV varies significantly across market segments:
| Segment | Typical ACV Range |
|---|---|
| Enterprise | $100K - $1M+ |
| Mid-Market | $25K - $100K |
| SMB | $5K - $25K |
| Self-Serve | $1K - $5K |
Segment-level ACV helps set appropriate sales motions and coverage models.
ACV vs. Related Metrics
| Metric | Definition | Use Case |
|---|---|---|
| ACV | Average annualized contract value | Typical deal size |
| TCV | Total Contract Value (full term) | Total commitment |
| ARR | Annual Recurring Revenue (total) | Business size |
| ARPU | Average Revenue Per User | Per-seat pricing |
Common ACV Mistakes
Mistake 1: Not Normalizing Multi-Year Deals
A $100,000 3-year deal should be $33,333 ACV, not $100,000. Failing to normalize inflates ACV and makes comparisons invalid.
Mistake 2: Mixing New and Expansion
New business ACV and expansion ACV serve different purposes. Keep them separate for accurate analysis.
Mistake 3: Including One-Time Revenue
Implementation fees, training, and professional services are typically excluded from ACV. Including them overstates recurring deal value.
Mistake 4: Inconsistent Contract Definitions
What counts as a "contract"? A master agreement with multiple orders? Each order separately? Define consistently to ensure valid ACV calculations.
Mistake 5: Ignoring Segment Variation
Company-wide ACV hides important differences. Enterprise and SMB ACVs differ dramatically - segment analysis reveals where growth is happening.
ACV Trends and Analysis
ACV Growth
Increasing ACV over time indicates:
- Moving upmarket
- Successful upselling
- Price increases taking hold
- Product expansion adoption
ACV Decline
Decreasing ACV may indicate:
- Increased discounting pressure
- Mix shift toward smaller customers
- Competitive pricing pressure
- Product simplification
ACV by Cohort
Track ACV by customer acquisition cohort:
| Cohort | New Deal ACV | Current ACV | Growth |
|---|---|---|---|
| 2021 | $18,000 | $28,000 | 56% |
| 2022 | $22,000 | $29,000 | 32% |
| 2023 | $25,000 | $27,000 | 8% |
Earlier cohorts show more expansion - good sign for customer value growth.
ACV in Context-Aware Analytics
metric:
name: Average Contract Value
description: Mean annualized contract value
calculation: |
SUM(contract_value / contract_years) / COUNT(contracts)
variations:
- name: New Business ACV
filter: contract_type = 'new'
- name: Expansion ACV
filter: contract_type = 'expansion'
- name: Median ACV
calculation: MEDIAN(annualized_contract_value)
includes: [recurring_subscription]
excludes: [one_time_fees, professional_services]
dimensions: [segment, product, region, sales_rep]
time_period: quarterly
owner: sales_ops_team
With governed definitions, ACV is calculated consistently across sales dashboards, board reports, and compensation calculations.
Using ACV for Planning
Sales Capacity Planning
Required Deals = Revenue Target / ACV
Required Reps = Required Deals / Deals per Rep
ACV directly impacts headcount planning.
Pipeline Requirements
Required Pipeline = Revenue Target / Win Rate
Pipeline per Deal = ACV
Number of Opportunities Needed = Required Pipeline / ACV
Quota Setting
Rep Quota = Expected Deals x ACV
ACV helps set realistic quotas aligned with deal profiles.
Marketing Investment
Allowable CAC = ACV x LTV Multiple x Margin
Higher ACV supports higher customer acquisition investment.
ACV is a foundational SaaS metric that connects individual deal performance to company-wide revenue strategy. By tracking ACV trends, segmenting appropriately, and using ACV for planning, sales and finance teams can make informed decisions about growth investments and go-to-market strategy.
Questions
ARR is total annual recurring revenue across all customers. ACV is the average contract value per customer. ARR = ACV x Number of Customers (approximately). ACV helps understand typical deal size; ARR shows total recurring business.