Weighted ACV vs ACV
Annual Contract Value (ACV) and Weighted Annual Contract Value represent two approaches to measuring contract-based revenue in SaaS businesses. ACV calculates the annualized revenue value of a customer contract, providing a standardized view of contract worth regardless of term length, making it easier to compare contracts of varying durations. Weighted ACV, as conceptualized by Nambdi Aregbulem, takes this a step further by incorporating probability factors into the calculation, typically based on sales pipeline stages, effectively discounting the potential revenue based on the likelihood of closing each deal, which provides a more realistic forecast of expected revenue rather than simply summing all potential deals at face value.
Consider a SaaS company with a sales pipeline containing numerous opportunities across different stages. Traditional ACV would be most appropriate when reporting actual closed business or when comparing the relative size of different customer contracts already secured. For example, if analyzing the company's current customer base to identify upsell opportunities, plain ACV clearly shows which accounts generate the most revenue. Conversely, Weighted ACV becomes invaluable during revenue forecasting and pipeline analysis, especially when reporting to investors or planning resources. If the company has $5 million in potential ACV spread across 20 opportunities at various stages, using Weighted ACV might reveal that the realistic expected value is closer to $2.1 million when accounting for the probability of winning each deal, providing a more conservative and accurate projection for financial planning.
Weighted ACV
Annual Contract Value
What is it?
Weighted Annual Contract Value (WACV) calculates the average contract dollar value with a weighted average proportional to the value of the contract. Essentially, higher value contracts are assigned more importance when calculating the total average contract value of a business. This approach is helpful to companies that have widely varying customer concentration by accurately calculating an ACV that is not skewed by contracts with low dollar value.
Annual Contract Value (ACV) represents the normalised dollar amount an average customer contract is worth to your company over one year. Unlike other SaaS metrics such as Annual Recurring Revenue (ARR), there's less universal consensus on ACV's precise definition across the industry. Some companies include one-time charges like setup fees, implementation costs, or training in their ACV calculations, while others exclude these non-recurring elements to focus purely on the ongoing contractual commitment. This variability makes it essential for sales and finance teams to establish clear internal definitions and remain consistent in their calculations to ensure meaningful trend analysis and benchmarking. The metric serves as a crucial indicator of your company's market positioning, customer segmentation strategy, and overall business model effectiveness. ACV directly influences your go-to-market approach, sales team structure, customer success investments, and pricing strategy. Companies with higher ACVs typically employ different sales methodologies, longer sales cycles, and more comprehensive customer onboarding processes compared to those targeting lower ACV segments.
Who is it for?
Categories
Formula
Example
Say you have three customers. Customer 1 has a contract value of $40,000 while the other two customers have a contract value of $5000 each. Adding up these numbers (40k + 5k + 5k), you get a total contract value of $50,000. You weighted ACV is calculated as follows: ($40,000 * ($40,000 / $50,000)) + ($5,000 * ($5,000 / $50,000)) + ($5,000 * ($5,000 / $50,000)). This gives you a WACV of $33,000. This is much more nuanced than the ~$17,000 you would get with the typical ACV metric.
The calculation should include all customers currently under contract, regardless of their contract length. For multi-year agreements, annualise the total contract value by dividing by the contract term length. Ensure consistency in how you handle partial years, contract modifications, and expansion revenue to maintain accurate trending over time. Consider a scenario with 100 customers across different contract structures: 30 customers signed 3-year contracts valued at $90,000 total, equivalent to $30,000 per year 30 customers signed 2-year contracts valued at $80,000 total, equivalent to $40,000 per year 40 customers signed 1-year contracts valued at $50,000 total, equivalent to $50,000 per year Year 1 ACV Calculation: ((30,000 × 30) + (40,000 × 30) + (50,000 × 40)) ÷ 100 customers = $41,000 Year 2 ACV Calculation: ((30,000 × 30) + (40,000 × 30)) ÷ 60 customers = $35,000 Year 3 ACV Calculation: (30,000 × 30) ÷ 30 customers = $30,000 This example illustrates how ACV evolves as your customer cohorts mature and contracts expire. The declining ACV trend suggests the need for strong renewal strategies and potential upselling initiatives to maintain contract values over time.
Published and updated dates
Date created: Oct 12, 2022
Latest update: Mar 17, 2025
Date created: Oct 12, 2022
Latest update: Aug 15, 2025