To put it briefly, ACV is the average amount of revenue generated per customer contract in a given year.
But what does that really mean?
For example: Let’s say you’re just starting your business and only have one customer. That customer decides to sign a $100,000 contract with your business for 5 years. In this scenario, the ACV with this customer would be $20,000.
But then, a week later, you acquire another new customer. This second customer also signs a $100,000 contract. But, this time, the contract is only for 2 years. Can you guess the ACV for this customer?
If you guessed $50,000, you’re correct! And that means you probably already knew or figured out the following formula:
Annual Contract Value Formula
Total Sum of Contract / Total Number of Years Under Contract = Annual Contract Value
But, unless you really are just starting out, you’re probably looking at more than one contract at a time. And you may want to know the annual contract value for all of your customers on annual subscriptions. So, let’s take a look at how you’d do that in the next section.