Short answer
Annual contract value (ACV) is the average yearly value of a customer contract's recurring fees: total recurring contract value ÷ contract length in years, usually excluding one-time fees such as setup or training. A three-year, $90,000 subscription has an ACV of $30,000. Total contract value (TCV) is the whole contract, one-time fees included. Annual recurring revenue (ARR) is the yearly recurring revenue from all active customers at a point in time.
- ACV = recurring contract value ÷ years in the contract; one-time fees usually stay out.
- TCV is the whole contract including fees; ARR is a company-wide snapshot of recurring revenue.
- On a ramped deal, ACV can overstate first-year revenue by half or more.
- "ACV" also means average contract value in some reports, so check the formula before comparing.
- Write down your rules for fees, ramps, short terms and monthly plans before you report ACV.
On this page
This page is for founders, sales leaders, RevOps and finance teams who report or get paid on contract value. It defines ACV, sets it beside TCV and ARR, and works through the contract shapes that make the simple formula go wrong: setup fees, ramps, odd-length terms, monthly plans and mid-term upsells.
ACV, TCV and ARR at a glance
| Annual contract value (ACV) | Total contract value (TCV) | Annual recurring revenue (ARR) | |
|---|---|---|---|
| What it measures | Average yearly value of one contract | Everything a contract is worth | Yearly recurring revenue across all customers |
| Formula | Recurring contract value ÷ years | Recurring fees for the full term + one-time fees | Sum of each active customer's current annualized recurring fees |
| One-time fees | Usually excluded | Included | Excluded |
| Scope | One contract | One contract | The whole customer base |
| Point in time | At signing | At signing | Today; changes with every new deal, upsell and cancellation |
| Typical use | Comparing deals, segment sizing, commission, CAC payback | Bookings, deal size on multi-year contracts | Company growth and valuation, net revenue retention |
ACV and TCV describe a contract. ARR describes a business. None of them is revenue in your financial statements, which follows accounting rules about when the service is delivered.
The formulas
ACV = (total contract value minus one-time fees) ÷ contract length in years
TCV = recurring fees for the full committed term + one-time fees
ARR = sum of each active customer's recurring fees, annualized at today's rate
Contract length is in years, so an 18-month term is 1.5 and a six-month term is 0.5.
Worked examples on five contract shapes
Illustrative example. The company and contracts are invented to show the arithmetic.
Quillmark (quillmark.example) sells e-signature software to mid-sized firms. Here are five deals it signed this quarter:
| Contract | Terms | TCV | ACV | ARR at signing | First-year value |
|---|---|---|---|---|---|
| A. Standard multi-year | 3 years at $30,000 a year, plus $6,000 onboarding | $96,000 | $30,000 | $30,000 | $36,000 |
| B. Ramped | 3 years: $20,000, then $30,000, then $40,000 | $90,000 | $30,000 | $20,000 | $20,000 |
| C. Odd length | 18 months, $27,000 in total | $27,000 | $18,000 | $18,000 | $18,000 |
| D. Monthly | $1,500 a month, cancel any time | $1,500 committed | $18,000 annualized | $18,000 | Not committed |
| E. Upsell on A | 20 more seats at $6,000 a year from month 13 to month 36 | $12,000 | $6,000 | Rises from $30,000 to $36,000 | None in year one |
How each one works:
- A. TCV is $30,000 × 3 + $6,000 = $96,000. ACV leaves out the onboarding fee: $90,000 ÷ 3 = $30,000. The first-year invoice is $36,000, because onboarding is billed up front.
- B. The ramp gives the same TCV and ACV as a flat $30,000 a year, but the customer pays only $20,000 in year one. ACV overstates first-year value by 50%, and ARR at signing is $20,000, rising each year as the ramp steps up.
- C. $27,000 ÷ 1.5 years = $18,000. Dividing by "one contract" instead of 1.5 years would inflate ACV to $27,000.
- D. Only one month is committed, so TCV is $1,500. Many teams annualize monthly plans ($1,500 × 12 = $18,000) for ACV and ARR, but count the deal as monthly recurring revenue and track churn closely, because nothing guarantees month two.
- E. The expansion adds $12,000 of TCV over its 24 months and $6,000 of ACV. ARR for the account rises the day the new seats start.
Contract B is the one to watch. If reps are paid on ACV or TCV, back-loaded ramps look as good as flat deals while the company collects a third less in year one. Teams that sell many ramped deals often pay commission on first-year value, or report both figures.
Why ACV matters
- Choosing a sales motion. ACV bands decide how much selling a deal can afford. A $3,000 ACV deal can't carry a field rep and a sales engineer; a $150,000 one can.
- CAC payback. Payback in years = customer acquisition cost ÷ (ACV × gross margin). With a CAC of $24,000, an ACV of $30,000 and an 80% gross margin, payback is $24,000 ÷ $24,000 = 1.0 year. See customer acquisition cost for the inputs.
- Pipeline and quota math. Quotas, pipeline targets and pipeline coverage all need deals in one consistent unit, and ACV is the usual one for subscriptions.
- Growth from existing customers. ACV added through upsells is the engine of a land and expand model.
Common confusions
- Annual vs average contract value. Some reports use ACV for average contract value: total revenue from contracts ÷ number of contracts, whatever their length. Others say annualized contract value. Read the formula, not the acronym.
- ACV vs first-year contract value. First-year value includes fees and the year-one ramp price. ACV averages the recurring fees over the term.
- ACV vs ARR. ACV is fixed at signing for one contract. ARR moves every day across all customers and is the figure to use for growth.
- ACV vs bookings. Bookings usually means TCV or first-year value signed in a period. Ask which.
Write your definition down
Companies define these metrics differently, which is why public companies are expected to explain theirs. The SEC's January 2020 guidance on key performance indicators in MD&A says it would generally expect "a clear definition of the metric and how it is calculated," along with why the metric is useful and how management uses it, and disclosure if the calculation changes between periods. The same discipline helps a private sales team. Settle these before your first report:
- One-time fees: in or out of ACV. Out is most common.
- Ramps: report the average across the term, the first year, or both.
- Short and odd terms: divide by the real length in years.
- Monthly plans: annualize, or report them as monthly recurring revenue only.
- Usage-based pricing: count the committed minimum, not hoped-for usage.
- Multi-year discounts: use the price actually signed, not list price.
Finding more accounts at the ACV you sell best is a list-building job. Bebop finds companies that match a plain-language description of your best-fit customers and explains why each one fits.
Next step: decide whether reps are paid on ACV, TCV or first-year value with the sales commission plan template.
Sources
- Commission Guidance on Management's Discussion and Analysis of Financial Condition and Results of Operations (Release Nos. 33-10751; 34-88094), U.S. Securities and Exchange Commission, 30 January 2020
Written by the Bebop team at Blackpearl Group. Last updated .
Questions people ask
How do you calculate annual contract value?
Take the total value of the contract's recurring fees and divide by the contract length in years. Leave out one-time fees such as setup, onboarding or training. A three-year contract worth $90,000 in subscription fees plus a $6,000 setup fee has an ACV of $90,000 ÷ 3 = $30,000. For an 18-month contract worth $27,000, divide by 1.5 years: ACV is $18,000.
What is the difference between ACV and TCV?
Total contract value (TCV) is everything the contract is worth over its full term, including one-time fees. Annual contract value (ACV) is the average yearly value of the recurring fees. A three-year deal at $30,000 a year with a $6,000 onboarding fee has a TCV of $96,000 and an ACV of $30,000. TCV shows deal size; ACV makes contracts of different lengths comparable.
What is the difference between ACV and ARR?
ACV describes one contract and is fixed when it's signed. ARR, annual recurring revenue, is the yearly value of recurring fees across all active customers at a point in time, so it changes with every new deal, upsell, downgrade and cancellation. On a ramped contract they differ even for one customer: a three-year deal at $20,000, $30,000 and $40,000 has an ACV of $30,000 but adds $20,000 to ARR at signing.
Does ACV include one-time fees?
Usually not. Most teams exclude setup, implementation, onboarding and training fees from ACV, because ACV is meant to show the recurring value of a contract. Those fees count toward total contract value and first-year contract value instead. Some companies do include them, which is one reason ACV figures from different companies aren't comparable. Whichever rule you choose, write it down and apply it to every deal.
What is a good ACV for SaaS?
There's no single good ACV; it depends on what your sales motion costs. Low-ACV products need self-serve or high-volume inside sales to stay profitable, while high-ACV products can afford field reps, sales engineers and long cycles. A useful test is CAC payback: customer acquisition cost divided by ACV times gross margin. If that takes many years, either raise ACV or lower the cost of selling.