ACV vs ARR: What’s the Difference & How to Calculate (2023)

There are so many SaaS acronyms used daily—LTV, CAC, MRR, ARR, ROI, ARPU—making it difficult to keep them all straight sometimes.

Annual recurring revenue, or ARR, is a commonly-used SaaS term, and for a good reason. It’s a momentum metric. There’s also ACV, which stands for “annual contract value.” With dozens of SaaS acronyms, ACV tends to get lost in the mix.

ACV and ARR seem similar, but they have some big differences. Throughout this article, I’ll explain the differences, how to calculate, and some other metrics you should also be tracking.

Table of Contents:
1. ACV vs ARR, what’s the difference?
2. Comparing ACV and ARR in action
3. When should you use ACV vs ARR
4. 4 other subscription metrics to keep an eye on
5. Let ProfitWell do all the calculating for you
6. ACV vs ARR FAQs

ACV vs ARR, what’s the difference?

ARR reveals how much recurring revenue you can expect based on yearly subscriptions. ACV, on the other hand, is the value of subscription revenue from each contracted customer, normalized across a year.

Your company should track ARR to measure overall growth and how much revenue you can expect in a year. It’s common to examine ARR on a company basis to gauge size. While ARR measures the value of recurring revenue at a single point in time, ACV normalizes that revenue across one or more years.

ACV looks at one customer in particular and sees what the expected payout over a year is. For example, if a customer signs a multi-year contract, e.g. a five-year deal with you for $50,000, then your ACV for a single year would be $10,000.


Comparing ACV and ARR in action

Now you know what ACV and ARR track, let’s break them down with an example.

Let’s say you have three customers

(Video) MRR vs ARR (Which One Should You Use and How Do You Calculate It?)

  • Customer A pays $500/year for 1 year
  • Customer B pays $400/year for 2 years
  • Customer C pays $300/year for 3 years

ACV

The basic formula for ACV is fairly simple. It’s the TCV -total contract value (excluding one-time fees) divided by the total years in the contract).

ACV vs ARR: What’s the Difference & How to Calculate (2)

Let’s break it down year-by-year.

All three customers are paying you in this first year. Your ACV for year one is $400. Here’s how I got that number:

Year 1: ($500 + $400 + $300) / 3 = $400

Your ACV for year two goes down to $350 because you have fewer customers. Here’s the calculation:

Year 2: ($400 + $300) / 2 = $350

Your ACV is even lower by the third year because you only have one customer left on the contract. Here are the numbers:

Year 3: $300 / 1 = $300

ARR

The formula for ARR is equally simple. ARR = (overall subscription cost per year + recurring revenue from add-ons or upgrades) - revenue lost from cancellations. Unlike ACV, no dividing is necessary when calculating ARR.

(Video) Difference between ACV and ARR in SaaS Sales

ACV vs ARR: What’s the Difference & How to Calculate (3)

Your ARR for year one is $1,200 because it’s a summation of what each customer paid you.

Year 1: $500 + $400 + $300 = $1200

Year 2 is also a summation but is only $700 because you have one less customer this year.

Year 2: $400 + $300 = $700

Finally, there’s not much math left for year 3 because there’s only one customer to account for.

Year 3: $300 = $300

Since ARR is a momentum metric, it has to remain as pure as possible.

With that, you need to include these factors when calculating ARR:

  • Customer revenue per year
  • Add-on purchases
  • Product upgrades
  • Product downgrades
  • Cancellations (churn)

When should you use ACV vs ARR

Calculating ACV and ARR results in different numbers, so when should you use each metric? To be frank, ACV isn’t a super-useful metric on its own, but pairing it with other SaaS metrics can provide some valuable insights. ARR is something you definitely can and should track on its own. I’ll break down the nuances.

Use ARR to measure year-over-year growth

Tracking ARR provides a high-level overview of your business’ health and helps you calculate the rate at which you need to grow to keep building on your success. Especially as a subscription company, recurring revenue underpins your pricing strategy and business model. Having a solid understanding of your ARR highlights your momentum and compound growth.

(Video) Average Revenue per Account (ARPA) vs Annual Contract Value (ACV) | Monday Night Metrics

With ARR, there’s also monthly recurring revenue or MRR. I’ll break down MRR on its own momentarily. Tracking both MRR and ARR allows you to plan for the short and the long term.

Companies with more than $10M in ARR focus on tracking their recurring annual revenue rather than monthly.

Use ACV over time to measure sales team and customer success performance

While ARR measures growth year-over-year, ACV is used over time to measure the performance of your sales and customer success teams.

Calculating ACV helps inform your strategy and guide how much you should be investing in sales and marketing efforts. Subscription businesses can be successful with either a high or low ACV; however, it’s important to know where your business is aiming. Lower-end ACVs are fine; it just means you’ll need more customers.

4 other subscription metrics to keep an eye on

As I alluded to earlier, there are dozens of subscription acronyms and metrics. Here are the top four that should be consistently on your radar.

Churn rate

Knowing when churn happens is extremely crucial. Customer churn is a direct reflection of the value of the product and features you’re offering to customers—making churn rate a valuable metric to track.

ACV vs ARR: What’s the Difference & How to Calculate (4)

Churn is the percentage of your customers who leave your service over a given period of time divided by the total remaining customers.

Churn rate = number of churned customers/total number of customers

Churn rate is a starting point, not an endpoint. Once you have your churn rate calculated, you need to deep dive into what’s causing it.

MRR

MRR is ARR just broken down on a monthly scale. Tracking MRR is crucial for financial forecasting and planning, AND measuring growth and momentum. You can make accurate financial projections in SaaS largely in part because MRR is consistent and predictable. MRR is a key indicator of the growth of a SaaS company. It’s like putting your growth under a microscope.

You can calculate MRR in four steps:

(Video) What is ARR, MRR and ACV? | ARR, MRR और ACV क्या है? | SaaS Sales | In Hindi | Pratik Pandey

  1. Align your data
  2. Sum up MRR
  3. Break down by cohort
  4. Calculate MRR growth

With ProfitWell Metrics, you can clearly attribute MRR by a monthly subscription plan and analyze growth on a plan-by-plan basis:

ACV vs ARR: What’s the Difference & How to Calculate (5)

CAC

CAC, or customer acquisition costs, are the total cost of sales and marketing efforts required to acquire a customer. The challenge with CAC is spending the right amount to drive new customers to your service without jeopardizing LTV (lifetime value). A successful business model means your CAC is significantly lower than LTV.

CAC = (total cost of sales and marketing)/(the number of customers acquired)

For example, if you spend $36,000 to acquire 1,000 customers, your CAC is $36 per customer.

Customer lifetime value

Finally, there’s customer lifetime value. LTV is the total dollar amount you’re likely to receive from an individual customer over the life of their account with your product.

Different LTV models can inform decisions like how much you can pay to acquire a new user, the effects of losing users, and how changes to a product affect the sum-total revenue you can expect to bring in from a user.

It’s an easy metric to look at to see the overall health of a product in terms of revenue and customer retention. A growing LTV means existing customers are happy and you will be giving you more money throughout their relationship with your company. A declining LTV indicates the company is making less from each customer and needs to make some changes.

Let ProfitWell do all the calculating for you

Operating a SaaS business requires diligence when tracking metrics like ARR, ACV, MRR, CAC, and LTV. You want to focus on retention and reduce churn, while still expanding your business and product. ProfitWell has a variety of tools that will help ease the confusion and give you revenue updates. With ProfitWell, you can spend less time calculating and more time growing your business.

ACV vs ARR FAQs

What is the difference between ACV and TCV?

ACV, or annual contract value, normalizes bookings across one year, while a TCV (total contract value) refers to all payments during the contract period.

Why do companies use ARR?

Both startups and established businesses use annual recurring revenue calculations to measure their progress and predict future performance. ARR also helps measure momentum for new contracts, upgrades/upsells, and renewals, but also metrics like churn or downgrades.

(Video) Actual Cash Value and Replacement Cost Value - ACV vs RCV - What's The Difference?

What is ARR for SaaS?

Annual recurring revenue (ARR) is a crucial metric for SaaS businesses with term subscription agreements with their customers. SaaS companies calculate ARR to gain insight into their term contracts and how well they are performing annually.

FAQs

What is ACV and how is it calculated? ›

Annual Contract Value (ACV) lets you see how much revenue your company generates per customer on average. The ACV formula is pretty simple – simply divide your total recurring revenue by the years in the contract. You can calculate ACV for long-term customers, short-term customers, and both combined.

How is ARR calculated? ›

The ARR formula is simple: ARR = (Overall Subscription Cost Per Year + Recurring Revenue From Add-ons or Upgrades) - Revenue Lost from Cancellations. It's important to note that any expansion revenue earned through add-ons or upgrades must affect the annual subscription price of a customer.

How do you calculate TCV and ACV? ›

As such, the calculations for these metrics are as follows: TCV = Monthly recurring revenue x Duration of contract [in months] + one-time fees. ACV = (Total Contract Value - one-time fees) / Duration of contract [in years]

How do you measure ACV? ›

To calculate ACV, use this formula: total contract value ➗ total years in contract = ACV. For example, if a customer signs a 5 year contract for $50,000, then your ACV would be $10,000. If the contract is written up on a monthly basis, you can calculate monthly recurring revenue (MRR) and multiply by 12.

How is ACV distribution calculated? ›

ACV weighted distribution = % ACV = (60 + 80) ÷ 180 = 78%

Why do we calculate ARR? ›

Because ARR is the amount of revenue that a company expects to repeat, it enables measurement of company progress and prediction of future growth. It's also a useful metric for measuring momentum in areas such as new sales, renewals, and upgrades – and lost off momentum in downgrades and lost customers.

How do I calculate ARR in Excel? ›

If you're using Excel to calculate ARR, follow these simple steps:
  1. In A1, write 'Year'.
  2. In C1-G1, write 1, 2, 3, 4, 5 (assuming a five-year project).
  3. In A2, write 'Net Income'.
  4. In C2-G2, write the net annual income for each year.
  5. In A3, write 'Initial Investment'.
  6. In B3, write the initial investment for the project.

How is ARR higher than total revenue? ›

Is ARR higher than revenue? Annual Recurring Revenue is not typically higher than revenue, overall, because it is subscription based, and doesn't include one-time charges or late fees (which are counted as revenue). It is expected that the amount you calculate for ARR is lower than the overall revenue.

What is the difference between ACV and TCV? ›

The main difference being that ACV helps you measure the average yearly revenue from a single contract, while TCV enables you to calculate the entire contract's revenue.

What is ACV annual contract value? ›

What is Annual Contract Value (ACV)? Annual contract value refers to the average annualized revenue per customer contract. Although ACV is not a standardized metric (meaning there's no generally accepted calculation method), companies typically exclude one-time fees for setup or onboarding.

What is included in ACV? ›

ACV is the average annual contract value. So on average it is $10k / year in your example. Whereas ACV Bookings refers to the total value of accepted term contracts calculated for 1 year, not multi-year (beyond one year, TCV (Total Contract Value) comes into play).

What does 100% ACV mean? ›

This metric is usually referred to as“% ACV”, which stands for “all commodity volume.” This number is a measurement of a store's total sales of all products relative to the sales of all relevant retailers in a given territory.

Is ACV the same as market value? ›

In contrast, actual cash value (ACV), also known as market value, is the standard that insurance companies arguably prefer when reimbursing policyholders for their losses. Actual cash value is equal to the replacement cost minus any depreciation (ACV = replacement cost – depreciation).

What does ACV total mean? ›

Actual cash value definition

Actual cash value (ACV) is the amount to replace your damaged or stolen property, minus depreciation, at the time of the loss.

What is ACV metric? ›

ACV definition

The ACV sales metric enables businesses to track the value of individual customer contracts over a year. Basically, it's the average annual dollar amount a contract is worth, excluding any one-time fees or purchases.

How is ACV calculated in SaaS? ›

ACV = (TCV - one-time fees) / total years in contract

To illustrate, let's look at a few examples of Annual Contract Value in SaaS billing agreements.

What does ACV distribution stand for? ›

ACV stands for “All Commodities Volume”. It is defined as the total sales of all products in a given store relative to the total sales of all products in competitive stores in a specified region or territory.

What is ARR in simple terms? ›

The accounting rate of return (ARR) is a formula that reflects the percentage rate of return expected on an investment or asset, compared to the initial investment's cost.

Is ARR a KPI? ›

What is Annual Recurring Revenue (ARR)? Overall, this KPI is an estimation of the revenue you'll have this year based on your current situation. Therefore, it takes into account the yearly subscription you have by now and your pricing strategy, among others.

Why is higher ARR better? ›

When comparing investments, the higher the ARR, the more attractive the investment. More than half of large firms calculate ARR when appraising projects. The key advantage of ARR is that it is easy to compute and understand.

What is ARR example? ›

For example, if a new machine being considered for purchase will have an average investment cost of $100,000 and generate an average annual profit increase of $20,000, the accounting rate of return will be 20%. The ARR on this investment is 0.20 x 100 or 20%.

What is the difference between ARR and total revenue? ›

The total revenue for your business considers all of your cash coming into the business, while ARR measures solely your subscription-based revenue. For example, if you provide one-time implementation fees or have an offering outside of your subscription business, then that revenue would not be part of your ARR.

Why is ARR different from revenue? ›

Unlike total revenue, which considers all of a company's cash inflows, ARR evaluates only the revenue obtained from subscriptions. Thus, ARR enables a company to identify whether its subscription model is successful or not.

What are the limitations of ARR? ›

Disadvantages or Weakness or Limitations of Accounting Rate of Return Method
  • The results are different if one calculates ROI and others calculate ARR. ...
  • This method ignores time factor. ...
  • A fair rate of return can not be determined on the basis of ARR.

How do you calculate total deal value? ›

Formulaically, the total contract value (TCV) is calculated by multiplying the monthly recurring revenue (MRR) by the term length of the contract, and adding any one-time fees from the contract.

Is ACV the same as LTV? ›

Customer Lifetime Value (LTV)

Where the two metrics differ is that the ACV looks at a particular customer, while LTV takes an average of all of your clients.

What is the difference between replacement cost and market value? ›

Market value is the estimated price at which your property would be sold on the open market between a willing buyer and a willing seller under all conditions for a fair sale. Replacement cost is the estimated cost to construct, at current prices, a building with equal utility to the building being appraised.

What is the difference between market value and actual value? ›

Market value is the company's value calculated from its current stock price and rarely reflects the actual current value of a company. Market value is, instead, almost more of a measure of public sentiment about a company.

What is the difference between ACV and replacement cost? ›

While both types of coverage help with the costs of rebuilding your home or replacing damaged items after a covered loss, actual cash value policies are based on the items' depreciated value while replacement cost coverage does not account for depreciation.

Which is better ACV or replacement cost? ›

ACV vs. RCV: Which is better? Generally speaking, replacement cost is a superior form of coverage. RCV provides a larger claim reimbursement since it include recoverable depreciation, while actual cash value coverage will leave you paying more out of pocket on a loss.

What is the difference between ACV and RCV? ›

If you have Replacement Cost Value (RCV) coverage, your policy will pay the cost to repair or replace your damaged property without deducting for depreciation. If you have Actual Cash Value (ACV) coverage, your policy will pay the depreciated cost to repair or replace your damaged property.

› annual-contract-value-acv ›

What Does ACV Mean in Sales? ACV, or annual contract value, is the total amount of revenue a contract has for a year. This metric is usually used by SaaS compan...
A popular way to calculate ACV involves X'ing up all the monthly recurring revenue numbers for each account over 12 months and dividing by the number of acc...

All About ACV

https://www.cpgdatainsights.com › distribution › all-about...
https://www.cpgdatainsights.com › distribution › all-about...
This article defines ACV (All Commodity Volume) and explains why and how this measure is used in CPG data analysis.

What does 100% ACV mean? ›

This metric is usually referred to as“% ACV”, which stands for “all commodity volume.” This number is a measurement of a store's total sales of all products relative to the sales of all relevant retailers in a given territory.

What ACV means? ›

What does Actual Cash Value (ACV) mean? ACV is the cost to replace or repair an item that is accidently damaged, destroyed or stolen, minus depreciation. Depreciation accounts for normal wear and tear of an item over time. Equation: Cost Brand New – Depreciation = Actual Cash Value.

How is ACV calculated in SaaS? ›

ACV = (TCV - one-time fees) / total years in contract

To illustrate, let's look at a few examples of Annual Contract Value in SaaS billing agreements.

What does ACV mean in accounting? ›

Annual contract value (ACV)

Is ACV the same as market value? ›

In contrast, actual cash value (ACV), also known as market value, is the standard that insurance companies arguably prefer when reimbursing policyholders for their losses. Actual cash value is equal to the replacement cost minus any depreciation (ACV = replacement cost – depreciation).

What is an ACV total? ›

Actual cash value (ACV) is a way to determine the value of your business property that's getting repaired or replaced after covered damage. Insurance companies calculate ACV by subtracting the depreciation from an item's replacement cost value.

Is ACV the same as retail value? ›

The actual cash value (ACV) of your car is the amount your insurance company will pay you after it's stolen, or totaled in an accident. Your vehicle's actual cash value is different from what you paid for the car when you bought it, which is called its retail value.

What is ACV in SaaS sales? ›

Annual contract value (ACV) is an average annual contract value of your account subscription agreements. For companies that also charge one-time fees in conjunction with recurring fees, the first-year ACV might be higher than later-year ACVs in a multi-year contract.

What is ACV revenue? ›

Annual contract value refers to the average annualized revenue per customer contract. Although ACV is not a standardized metric (meaning there's no generally accepted calculation method), companies typically exclude one-time fees for setup or onboarding.

What is the difference between ACV and RCV? ›

If you have Replacement Cost Value (RCV) coverage, your policy will pay the cost to repair or replace your damaged property without deducting for depreciation. If you have Actual Cash Value (ACV) coverage, your policy will pay the depreciated cost to repair or replace your damaged property.

What is the difference between ACV and replacement cost? ›

While both types of coverage help with the costs of rebuilding your home or replacing damaged items after a covered loss, actual cash value policies are based on the items' depreciated value while replacement cost coverage does not account for depreciation.

Why is ARR higher than revenue? ›

Is ARR higher than revenue? Annual Recurring Revenue is not typically higher than revenue, overall, because it is subscription based, and doesn't include one-time charges or late fees (which are counted as revenue). It is expected that the amount you calculate for ARR is lower than the overall revenue.

What is the difference between ARR and revenue? ›

The total revenue for your business considers all of your cash coming into the business, while ARR measures solely your subscription-based revenue. For example, if you provide one-time implementation fees or have an offering outside of your subscription business, then that revenue would not be part of your ARR.

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