ACV for SaaS companies: Definition, calculation, and impact in 2025

More than just a number, ACV provides a window into customer value, revenue predictability, and strategic growth opportunities. It's a compass guiding SaaS businesses towards sustainable profitability.

But what exactly is ACV, how is it calculated, and how can it be kept high?

This post explains the core of ACV, exploring its definition, calculation, and impact on your SaaS business in 2025. Read on to learn:

• The precise definition of ACV in the SaaS context
• A clear, step-by-step guide to calculating ACV
• How ACV interacts with other vital SaaS metrics like ARR and CAC
• The key factors that influence ACV and strategies to increase it
• Common misconceptions surrounding ACV and how to avoid them
• How a modern billing platform such as Orb can help a company keep a high ACV

Let’s get started with what the ACV SaaS metric means.

What is ACV in the SaaS world?

The annual contract value (ACV) is the average annualized revenue per customer contract, excluding one-time fees. In the SaaS industry, where subscription models reign, ACV serves as a critical metric for understanding customer value and forecasting revenue.

Put simply, it’s a measure of the worth of a single customer's subscription for a year.

Why does this matter? For SaaS businesses, ACV provides a lens through which to view expected recurring revenue. It aids in strategic planning, allowing companies to gauge the potential income from new accounts.

What does ACV mean in sales?

The ACV SaaS metric helps businesses estimate how much revenue they can expect from new customers, assisting with growth projections and performance management. ACV plays a role in several key areas:

• Sales performance: It can act as a benchmark for individual sales representatives, highlighting those best suited for high-value accounts.
• Strategic growth: ACV helps spot opportunities for upselling and aids in customer retention, which in turn maximizes customer lifetime value (LTV).
• Resource allocation: Especially for startups, ACV provides insights that help in making the best use of limited resources.
• Pricing strategy: ACV can help to inform how a company prices their products.
• Sales and marketing: ACV can help a business understand if their sales and marketing efforts are working.

ACV should not be viewed in isolation. Instead, combine it with other key performance indicators (KPIs) like customer acquisition cost (CAC), total contract value (TCV), and annual recurring revenue (ARR) to get a clearer picture of your business's health.

Note: We’ll go into detail about ACV’s interplay with other metrics after we discuss how to calculate ACV. For more on key SaaS benchmark metrics check out or post on that topic.

How to calculate ACV

Calculating ACV is a pretty to-the-point procedure, yet it is key to grasp the nuances to make sure you’re doing it right. The standard formula for ACV is:

ACV = Total Contract Value (TCV) / Contract Duration (Years)

Here's a step-by-step breakdown:

1. Determine total contract value (TCV): This number represents the entire value of the contract. Include all recurring revenue, but exclude one-time fees like setup or onboarding costs.

For example, a contract with $150,000 in recurring revenue and a $10,000 setup fee has a TCV of $150,000.

1. Determine contract duration. Remember contracts are sometimes expressed in months, so think 36 months.
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2. Divide TCV by contract duration: Divide the TCV by the number of years in the contract. The resulting figure is the ACV.

Hypothetical example

Imagine a SaaS company, "TechSolutions," signs a new client to a 3-year contract. The contract's recurring revenue is $120,000. There are also $5,000 in implementation fees. These would be our variables:

• TCV: $120,000 (excluding the $5,000 implementation fee)
• Contract duration: 3 years

Now, calculate the ACV:

ACV = $120,000 / 3 years = $40,000

In this case, TechSolutions' ACV for this contract is $40,000.

Remember: TheACV SaaS metric is designed to provide the annual value of a contract. Therefore, one-time fees are always excluded.

When calculating ACV for multiple contracts, you can either calculate the ACV for each contract individually and then find the average, or sum the TCVs and divide by the total contract years.

ACV vs. other SaaS metrics

Understanding the interplay between ACV and other key SaaS metrics is crucial for a complete view of a company's financial health. ACV, on its own, provides valuable data, but when combined with other metrics, it reveals deeper trends and informs strategic decisions:

ACV vs. annual recurring revenue (ARR)

ARR tracks the total recurring revenue generated annually from all subscription contracts. While ACV focuses on individual customer value, ARR provides a broader view of the company's recurring revenue stream.

By comparing ACV and ARR, a SaaS business can assess its growth trajectory.

For example, if ARR is growing rapidly while ACV remains stagnant, it suggests that the company is acquiring more customers, but not necessarily higher-value ones. Conversely, a rising ACV alongside a steady ARR indicates an increase in the value of individual contracts.

ACV vs. total contract value (TCV)

TCV represents the total value of a contract over its entire duration. ACV annualizes this value, providing a standardized measure for comparison. TCV offers a holistic view of a contract's total worth, while ACV allows for annual comparisons across various contract lengths.

A significant difference between TCV and ACV may indicate longer-term contracts, while a close relationship could suggest shorter-term agreements. Analyzing the difference helps businesses understand customer commitment and contract duration.

ACV vs. customer acquisition cost (CAC)

CAC measures the cost of acquiring a new customer. Comparing ACV and CAC helps determine the payback period: the time it takes to recoup the cost of acquiring a customer.

A high CAC relative to ACV means a longer payback period, while a low CAC relative to ACV indicates faster recovery.

Remember: This comparison offers insights into the profitability of customer acquisition efforts. One could look at the ratio of CAC to ACV, and ask themselves, “Is the ratio healthy?”

ACV vs. customer lifetime value (LTV)

LTV predicts the total revenue a customer will generate throughout their relationship with the company. Comparing ACV and LTV provides a view of the long-term value of customers relative to their annual contract value.

A healthy SaaS business typically has an LTV significantly higher than its ACV. This comparison helps assess the long-term profitability of customer relationships. The ACV SaaS metric used in conjunction with LTV can help a company decide how much to invest in customer retention.

Which factors influence ACV for a SaaS business?

A company's ACV is not static and can be influenced by internal and external factors. Here are some of the primary factors that influence the ACV metric:

• Contract length: Longer contract terms often result in higher TCV, which, when annualized, can influence ACV. Businesses may offer discounts or incentives to encourage multi-year agreements, impacting the final ACV.
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• Pricing strategies: Tiered pricing, usage-based pricing, and feature-based pricing all affect the amount customers are willing to pay. Changes to pricing models or discounts directly impact ACV.
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• Customer segmentation: Different customer segments (e.g., small businesses vs. enterprises) have varying budgets and needs. Enterprise clients tend to sign higher-value contracts, leading to a higher ACV than individual users or small businesses.
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• Upselling and cross-selling: The ability to upsell or cross-sell additional features or services to existing customers directly increases ACV. Successful strategies to expand customer spending result in a higher average contract value.
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• Customer churn: High churn rates can indirectly impact ACV. If a company loses high-value customers, the average ACV may decrease. Conversely, retaining high-value clients sustains or increases ACV.
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• Market conditions: Economic downturns or increased competition may force businesses to lower prices or offer discounts, affecting ACV. Market demand and industry trends also play a significant role.
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• Sales and marketing efforts: The effectiveness of sales and marketing strategies in attracting and converting high-value customers influences ACV. Targeted campaigns and efficient sales processes can lead to higher average contract values.
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• Product value and features: The perceived value of a product, and the features it offers, will impact how much a client is willing to pay. A product that solves a critical problem for a client will command a higher price, increasing the ACV SaaS metric.

How can a company increase its ACV?

A higher ACV can lead to increased revenue without necessarily acquiring more customers. Here are several ways a company can effectively increase its ACV:

• Upselling and cross-selling: Offer existing customers higher-tier plans or extra features. Spot opportunities to cross-sell complementary products or services that improve the customer's experience and increase their spending.
  
  For example, tailored recommendations based on customer usage and needs can be particularly effective.
• Improving product offerings: Up the value proposition of your product by adding new features, improving existing functionality, or integrating with other popular tools.
  
  Remember, a more valuable product justifies higher pricing and encourages customers to upgrade. Focus on features that address the pain points of high-value customer segments.
• Adjusting pricing models: Explore different pricing strategies, such as usage-based pricing (and consequently implementing usage-based billing). Consider offering enterprise-level plans with added support or customization.
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• Targeting higher-value customer segments: Focus sales and marketing efforts on attracting enterprise clients or larger organizations that typically have higher budgets. Develop targeted campaigns and content that resonates with these segments. A shift in focus can substantially impact the ACV SaaS metric.
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• Extending contract lengths: Incentivize customers to sign longer-term contracts by offering discounts or exclusive benefits. Multi-year agreements increase TCV, which, when annualized, results in a higher ACV.
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• Boosting customer success and retention: Offer exceptional customer support and proactive assistance to ensure customer satisfaction. Retaining high-value customers is crucial, as they are more likely to renew contracts and expand their spending. A company can also provide training or dedicated support to increase customer value.
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• Offering premium support and services: Introduce premium support packages, dedicated account managers, or consulting services to add value and justify higher contract prices. These offerings appeal to customers who require extra assistance or want a more personalized experience.
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• Strategic partnerships: Form partnerships with complementary businesses to offer bundled solutions or integrated products. Joint offerings can increase the perceived value and attract customers willing to pay more for a comprehensive solution.

What’s a good ACV range in the SaaS industry?

ACV varies significantly based on numerous factors, including the business model, target market, and product offerings. However, some general insights can be gleaned.

The median ACV for private SaaS companies has been reported to be around $21,000. However, this figure is a broad average and doesn't account for the wide range of SaaS businesses. A significant percentage of companies fall below $5,000, while others exceed $100,000.

It's essential to understand that a "good" ACV is relative. A low ACV doesn't necessarily indicate poor performance, nor does a high ACV guarantee success. The key is to evaluate ACV in the context of other metrics and the company's specific goals.

Can ACV vary across different industries?

Yes, ACV can vary significantly across different SaaS sectors and business models. B2B SaaS companies, particularly those serving enterprise clients, typically have higher ACVs compared to B2C SaaS businesses.

For example, a CRM software provider targeting large corporations will likely have a much higher ACV than a mobile app offering individual subscriptions.

Factors such as the complexity of the product, the value it provides, and the target customer's budget all play a role. Industry-specific regulations and market conditions can also influence ACV. Understanding these variations is crucial for benchmarking and strategic planning.

3 Common misconceptions about ACV

ACV, despite its importance, is often misunderstood. Clearing up these misconceptions is vital for accurate financial analysis and strategic planning. Let’s start with the first one:

Misconception 1: ACV is the same as ARR

While both metrics relate to annual revenue, they serve different purposes. ACV represents the average annual value of a single customer contract, while ARR is the total recurring revenue generated from all active subscriptions.

ACV focuses on individual contract value, while ARR provides a holistic view of the company's recurring revenue stream. They are related, but not interchangeable.

Misconception 2: One-time fees should be included in ACV

Another misconception is that one-time fees, such as setup or onboarding costs, should be included in ACV calculations. ACV specifically measures the annualized recurring revenue from a contract, excluding any non-recurring charges.

Including one-time fees can skew the ACV and provide an inaccurate representation of the annual contract value. Consistency in excluding these fees is essential.

Misconception 3: A high ACV always indicates success

It's often assumed that a high ACV automatically translates to business success. However, ACV should not be viewed in isolation. A high ACV may be offset by high customer acquisition costs (CAC) or high churn rates.

A holistic view of financial metrics, including CAC, LTV, and churn, is necessary to assess overall business health. Context matters more than a single metric.

Note: For more info about billing and key business metrics, read more of our blog entries.

How Orb helps you keep a high ACV

We’ve talked about how your ACV is a key indicator of your SaaS business's health. But are you maximizing its potential? Your billing platform plays a pivotal role in maintaining and growing your ACV.

Orb is a billing platform that helps SaaS and GenAI usage-based billing companies to turn financial insights into growth, directly impacting your ACV.

We enable businesses to optimize their billing strategies so that every contract delivers its maximum value. By decoupling usage data from pricing metrics, ensuring precise billing, and providing a scalable unified system, Orb allows you to move faster and smarter.

Here's how Orb can help you elevate your ACV:

• Adapt with agility: Quickly test and refine pricing models to attract and retain high-value customers, directly influencing your ACV. Orb decouples usage and pricing metrics through Orb RevGraph, allowing for dynamic experimentation with Orb SQL Editor and rapid price adjustments.
  
  This means you can quickly see what pricing strategies lead to the highest ACV SaaS metric. Orb enables frictionless experimentation and improvement of monetization strategies.
• Bill with precision: Ensure accurate, reliable billing and financial workflows that build customer trust and prevent revenue leakage, safeguarding your ACV.
  
  Orb RevGraph provides a single source of truth for precise, granular, and auditable billing, invoicing, and reporting, making sure that every contract is billed correctly, and that no revenue is lost. Orb offers precise, error-free billing through Orb RevGraph, ingesting and processing all raw event data.
• Confidently scale: Grow your business with tools and expertise designed for high performance and extensibility, supporting the growth of your ACV.
  
  Orb's scalable API and powerful tools, paired with trusted guidance, guarantee smooth operations as you grow, allowing you to handle increasing contract values without operational bottlenecks.

Orb provides a scalable, unified system that eliminates integration headaches and supports high-volume data ingestion.

Ready to see how Orb can help you keep a high ACV? Explore Orb’s flexible pricing options to find a plan that works for you and get started.