ACV vs ARR
Annual Contract Value (ACV) and Annual Recurring Revenue (ARR) are closely related SaaS metrics that measure contract value in different ways. ACV represents the average annualized revenue per customer contract, normalizing contracts of varying lengths and payment terms to a single annual figure, typically excluding one-time fees and focusing on the recurring portion. ARR, on the other hand, measures the total value of recurring revenue components from all active subscriptions on an annualized basis, providing a comprehensive view of predictable annual revenue from the entire customer base rather than on a per-contract basis.
A SaaS company should focus on ACV when analyzing sales performance or evaluating changes in deal size over time. For instance, if a company notices their ACV increasing quarter over quarter, it indicates the sales team is successfully targeting larger clients or more effectively upselling existing customers. Conversely, the company would emphasize ARR when communicating with investors about overall business growth and stability, or when forecasting future revenue. If the same company loses a few large contracts but gains many smaller ones, their ACV might decrease while their ARR continues to grow—showing that while individual deal sizes are shrinking, the business is still expanding its recurring revenue base, which is ultimately more important for long-term company valuation.
Annual Contract Value
Annual Recurring Revenue
What is it?
Annual Contract Value (ACV) is the dollar amount an average customer contract is worth to your company in one year. There tends to be less universal consensus on the definition of ACV compared to some other SaaS metrics, such as Annual Recurring Revenue. For example, some companies include one-time initial charges like setup or training in their ACV calculations, while others don’t.
Annual Recurring Revenue (ARR) is the sum of all subscription revenue expressed as an annual value. For most companies, ARR is the sum of all new business subscriptions and upgrades (sometimes called expansion), minus downgrades (or contractions) and cancelled subscriptions. Though not a Generally Accepted Accounting Principle (GAAP) value, it's the Revenue equivalent used by every SaaS company. ARR is used interchangeably with Monthly Recurring Revenue (MRR).
Who is it for?
Categories
Formula
Example
You have 100 customers. 30 signed a 3-year contract with a contract value of $90,000, equivalent to $30,000 / year. 30 signed a 2-year contract with a contract value of $80,000, equivalent to $40,000 / year. 40 signed a 1-year contract with a contract value of $50,000, equivalent to $50,000 / year First Year Annual Contract Value = ( (30,000 x 30) + (40,000 x 30) + (50,000 x 40) ) / 100 customers Year 1 ACV = $41,000 Second Year Annual Contract Value = ( (30,000 x 30) + (40,000 x 30) ) / 60 customers Year 2 ACV = $35,000 Third Year Annual Contract Value = (30,000 x 30) / 30 customers Year 3 ACV = $30,000
If a customer subscribes to a service with a 1-year renewal agreement for $12,000, then Annual Recurring Revenue would be; ARR = $12,000 If a customer subscribes to a service for $10,000 (with no contract), then Annual Recurring Revenue would be; ARR = $0 If a customer subscribes to a service with a monthly renewal agreement for $1,000 per month, then Annual Recurring Revenue would be; ARR = $1,000 * 12 = $12,000
Published and updated dates
Date created: Oct 12, 2022
Latest update: Mar 31, 2023
Date created: Oct 12, 2022
Latest update: Mar 17, 2025