All SaaS companies are looking for the same thing: product success. Here’s a little metric we want to introduce you to that you may not know can help you achieve this: Annual Contract Value (ACV) of Sales.
ACV in Sales is a key metric in sales that evaluates not only your sales performance but also your customers and how much money they’re spending on you. When combining it with other metrics, you can start identifying vital parts of your strategy that will translate into your overall success. This way, you’ll make more informed decisions, and you can start directing your resources and energy to the right places.
Neat, right? Even though it’s not a standardized sales metric and sometimes flies under the radar, it’s crucial for company success. It lets managers see which clients are bringing in higher revenue, and which ones are worth their time and effort. But what exactly is ACV? How do you measure it? And how does it actually help you grow your business?
Keep reading to learn how to use this metric and increase your average ACV in sales, including:
- What is ACV?
- What is the importance of knowing and tracking your ACV?
- Difference between ACV and ARR
- How ACV optimizes SaaS Strategy
Ready? Let’s dive in!
What is ACV?
Annual Contract Value (ACV) is a sales metric that allows SaaS, and businesses in general, to keep track of how valuable customers’ contracts are over a year. In other words, it’s the amount of money a contract is worth in an average year – without taking into account other factors like one-time payments/fees or other types of purchases.
With your client’s monthly contracts, annual subscriptions, and consulting services, you’re able to estimate how much profit each client brings your company. Basically, following this metric helps you understand which client is more valuable, and makes strategizing a growth plan moving forward a lot easier.
It’s obvious, then, that this simple metric can help you make more effective and smarter decisions when it comes to your sales strategy. So how exactly do you calculate it?
How to calculate ACV?
Now that you know the importance of ACV and why you should take it into consideration, let’s learn how to calculate ACV. You can use this formula:
ACV = Total contract value ➗ Total years in contract
To calculate it, simply take the total value of the contract and divide it by the years of the contract. Here’s a quick example to make sure you’ve got it!
Let’s say you sign up a customer for 4 years (48 months) to your product for a total of $80,000. ACV measures how much you earn from a customer over a 12-month period, so you need to divide the total by the number of years, making the ACV $20,000. This is the money this specific client is making you each year.
Remember! This formula shouldn’t include any one-off fees, just the subscription amounts.
Now that you know how to calculate it, let’s talk about why it’s essential to make your business the best it can be (and the most profitable!)
The importance of tracking your Sales ACV
To have a successful company, knowing how much you’re spending vs how much you’re earning is essential. The combination of ACV with other metrics like Customer Acquisition Costs (CAC) or Accounting Rate Revenue (ARR) allows you to have a fully developed overview of your current performance. Maybe you start seeing a gradual increase in the number of clients with a high ACV – that lets you know that your product is showing value. Tracking your ACV lets you:
Learn which accounts to prioritize
Knowing the ACV of each of your clients allows you to prioritize accounts for maximum yield. Company resources aren’t limitless – even with onboarding software, management software, or incredible customer service, oftentimes you’ll find your team members spreading themselves thin and still have clients left to fend for themselves. Taking into account which clients generate the most revenue for your business is key to directing your focus, time, and energy to where it matters most – the highest-value clients.
Measure Sales Reps’ performance
With ACV, you can measure your sales representatives’ performance. Notice a new high-value client? Identified the sales rep that made that account happen? Well, now they’re a high-value employee!
Another great way to ensure your employees bring in high-value clients is by giving them the knowledge and tools to showcase your product in the best way. With a successful employee onboarding, you can do just that!
Which new opportunities (like cross-selling and upselling) will bring you better customer retention? With ACV, you can calculate this. After all, it’s important to reduce churn and increase the customer’s LTV (lifetime value) to keep growing as a business. Especially if you’re a small startup – you’ll get more out of your limited resources.
You can combine ACV with other metrics in order to really map out current success and identify downfalls, such as Customer Acquisition Costs (CAC), which is the money you spend acquiring new customers, Total Contract Value (TCV), the total revenue a single contract brings you, and Annual Recurring Revenue (ARR). Measuring your ACV in conjunction with these metrics allows you to have a bigger picture of your spending, and maximizes your chances of growth.
You may have heard of ARR before, but it’s important not to get this mixed up with ACV. Let’s clear up the difference now, shall we?
What’s the difference between ACV and ARR?
So, what’s the real difference between ACV and ARR?
ARR (Accounting Rate Revenue) is a metric that shows the amount of money a SaaS company makes over a year (based on the initial investment). Even though it sounds similar to ACV, there are some key differences. For example, ACV can include one-time fees or purchases, where ARR does not – and ARR measures multiple accounts at the same time, whereas ACV does it individually.
This metric is not only about which client earned you more money but also about what your future prospects are.
This is the ARR formula:
ARR = Asset’s average revenue ➗ Company’s initial investment
ARR is super useful when you want to keep track of your revenue growth, and it’s used to help make better sales, marketing, and business decisions overall. It works perfectly with ACV – both aim to help you refocus your energy and resources, and to create the best strategy there is for your company, so you can keep earning more money each year.
How Sales ACV optimizes SaaS strategy
ACV lets companies keep their priorities straight by measuring which client is more profitable. Thanks to this metric, you’ll not only be able to focus your resources and energy on those high-value clients, but also on your top sales representatives that brought them to you. Aligning this metric with other important ones like CAC, TCV, and ARR gives a bigger picture of your spending, profitability, and future prospects. As a result, your SaaS company will start growing in no time, so don’t hesitate to start using ACV to improve your business!
The FROGED product success platform has a variety of intelligent solutions designed specifically to guarantee your customer success, using metrics like ACV and more to optimize your SaaS product.
Eager to get started with FROGED? Book a demo to start increasing your average ACV in sales!