What one customer contract is worth per year: the recurring part only, one-off fees excluded, a multi-year deal brought back to one year.
In practice
ACV is the number that decides what you can afford to spend on selling. The smaller the contract, the less sales time it pays for: ACV is what says whether a customer is worth a call, a demo, or a whole team. That is why it is read next to the acquisition cost more than next to anything else: it is what says in how many months a customer pays back what it cost. Two traps distort it, in the same direction. An amount entered for the full length of a three-year contract triples the ACV, and set-up fees billed once slip in as if they came back every year. And like any average, it can be dragged by one large contract: look at the median beside it. Do not confuse it with ARR either, which adds up every active contract, or with the average revenue of the whole base, which mixes new customers with old ones.
The formula
ACV = total annual value of the new-customer contracts signed in the period ÷ number of those contracts
- Annual value
The recurring amount per year. A three-year contract at €72,000 counts for €24,000; a monthly contract at €2,000 counts for €24,000 too. Anything billed once — set-up, training, a migration — stays out.
- New-customer contracts
The deals that won a customer in the period. Renewals and expansions have their own metrics; mixed in, they describe the installed base rather than what the sales team is winning today.
- The average
The right statistic for the total — ACV × contracts gives back the value signed — and the wrong one for the typical deal. Publish the median beside it: when the two drift apart, one or two large contracts are carrying the quarter.
ACV is a per-contract value. ARR — annual recurring revenue — is the sum over every active contract, and TCV — total contract value — is one contract over its whole length. Three acronyms that look alike and answer three different questions.
Worked example
€24,000, and what it pays for
- From June to August, a B2B software company signs 18 new contracts worth €432,000 a year in total. ACV = 432,000 ÷ 18 = €24,000, or €2,000 a month per contract.
- At the end of August, its 100 sales-assisted customers bring in €180,000 of monthly recurring revenue: €1,800 each on average — the average revenue per account, or ARPA. ACV ÷ 12 and ARPA differ because they do not count the same customers: the 18 signed this quarter for one, all 100 for the other. Neither is wrong; using one for the other is.
- The acquisition cost is €19,000 per new customer. Suppose a gross margin of 75%: a contract earns 2,000 × 0.75 = €1,500 of margin a month and pays back its cost in 19,000 ÷ 1,500 ≈ 12.7, so 13 months. At 60%, once onboarding is counted in the cost of serving, it is 19,000 ÷ 1,200 ≈ 15.8, so 16 months.
- Now suppose one of the 18, worth €24,000 a year, runs for three years and is entered at its full value, €72,000. The total becomes €480,000 and the ACV €26,667 — an 11% rise produced by a data-entry choice, and a payback that looks more than a month shorter than it is.
ACV is where the sales model gets its price: it decides how many months of margin a customer needs to repay its acquisition. Annualise every contract, keep one-off fees out, and read it with the median — a quarter carried by one large deal is not a new price level.
Orders of magnitude
- ACV has no good or bad value: it spans several orders of magnitude from one category to another, and it describes a business model rather than a performance. The question it answers is which way of selling the contract can pay for.
- One framing that has lasted, as context and not as a target: Christoph Janz (Point Nine Capital), "Five ways to build a $100 million business", 5 October 2014. To reach $100 million a year, you need about 1,000 large companies paying $100k+ a year, 10,000 mid-sized ones paying $10k+, or 100,000 small businesses paying $1k+. He speaks of revenue per account rather than ACV, but on annual contracts the arithmetic is the same — and he ties the $10k tier to an inside sales team, the $100k tier to enterprise selling and its long cycle.
- The comparison worth tracking is your own ACV over time, split by segment, with the median beside the average. An average that rises while the median stays flat means the rise came from a few large deals, not from the typical one.
How to improve it
- Annualise every contract the same way before averaging: total recurring value ÷ years, one-off fees out. Many ACV surprises are data-entry choices, not pricing.
- Price by segment and read ACV by segment. A single average over small and large accounts describes neither, and it is the segment figure that says which way of selling each one can afford.
- Raise it through what the customer uses, not through the length of the contract. A three-year commitment lowers risk and changes nothing to the annual value; more seats, a higher plan or a second product do.
- Check it against the cost of selling. If the months of margin needed to repay an acquisition keep growing, the fix may be in the ACV — or in selling that segment another way.
In the Tour
Do you know your LTV, even roughly?
- Yes, a solid estimate20 pts
- A very rough guess7 pts
- No idea0 pts
The Tour asks whether you know your LTV, even roughly — 20 points for a solid estimate, 7 for a very rough guess, 0 for no idea. In a sales-assisted business, ACV is the first input of that estimate and the easiest to get right: the contracts are signed, and the amounts are in the CRM. LTV — lifetime value — is then ACV ÷ 12 × gross margin × the months a customer stays, and what tends to be missing is the margin or the renewal rate, not the ACV. A team that can state its ACV this afternoon is closer to the 20-point answer than it thinks.
Questions people ask
What does ACV stand for?
Annual contract value: what one customer contract is worth per year, recurring part only. The acronym is the one sales teams use, in French as in English. Outside software the same three letters mean other things — in insurance, for instance — so spell it out once in any document that leaves the team.
ACV vs ARR: what is the difference?
ACV is per contract, ARR is a total. ARR — annual recurring revenue — adds up the annual value of every active contract; ACV averages the annual value of the contracts signed in a period. 18 new contracts at €24,000 of ACV add €432,000 to ARR, minus whatever the base lost in the meantime.
How do you calculate ACV on a multi-year contract?
Divide the recurring value by the number of years: a three-year contract at €72,000 has an ACV of €24,000. If the price rises each year, the average over the term is a common convention; write down the one you use, because the first-year value is lower and both circulate.
Do set-up fees count?
Not in ACV. They are billed once, and ACV is used to project what comes back every year. Report them separately, in a first-year total if you need one; blended in, they flatter every quarter heavy in new customers and none of the years that follow.