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Amol Ghemud Published: December 27, 2022
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Introduction
The profitability of any business is determined by key SaaS metrics. And one primary aspect that every business model relies on is getting familiar with the health of the business and what are the best ways through which one can measure and manage its growth.
There are innumerable SaaS metrics to monitor, with some having a higher value than others. What remains vital for every business is to focus on those metrics that help in the overall growth of the business.
The fact is most business models rely on an annual subscription model, and this is when the term Annual Contract Value (ACV) comes into the picture. Annual Contract Value, or ACV, is not a quite popular metric in SaaS and often tends to go under the radar. But, when seen from a bigger point of view, it turns out to be one of the most essential metrics to measure the effectiveness of your commercial teams, be it marketing or sales.
What Does ACV Actually Mean?
Annual Contract Value (ACV), as the term signifies, is a revenue metric that helps in calculating the worth of an individual customer subscription or contract over a period of a year. The SaaS business model’s primary focus is on having annual contract value from their customers rather than a one-time approach, and hence ACV becomes a vital metric for such businesses. ACV revenue metric helps businesses evaluate their entire data to gain a better and clear understanding of their sales and marketing strategies.
How Can ACV Be Calculated?
Simply put, ACV is a straightforward calculation, as mentioned below:
ACV = Total Contract Value / Total Number of Years in The Contract
The fact is that ACV may vary from company to company. For e.g., some companies might want to include the insurance and set-up costs, while others might want the same to remain untouched. So no matter what nature of business one possesses, the standard ACV calculating method can be followed without any extra hassle.
ACV helps numerous businesses apprehend how many clients they should get in order to reach their next sales target. An accurate sales program can be made by figuring out the sales cycle and by knowing the size of an average deal.
Why is Annual Contract Value important in a business’s sales and marketing?
· ACV can be one of the ways to gauge a particular salesperson’s performance to keep proper track of the achievements and the annual revenue that got generated referring to that individual.
· Annual Contract Value helps in determining each individual client’s actual value.
· ACV is a major factor in formulating strategic business decisions and onboarding strategies for the new sales rep.
· ACV is highly beneficial for businesses as it helps them improve their sales training programs and determine their ROI for hiring practices.
· Annual Contract Value has a major hand in providing an accurate framework for revenue forecasting.
· Annual Contract Value (ACV) can also be used in calculating Annual Recurring Revenue (ARR) as it indicates the expected revenue that a business could earn from its existing customers annually.
· ACV is a valuable tool that helps businesses track down their growth over a period of time, and one can as well compare their ACVs periodically to analyze the business growth.
· An increase in ACV gives a clear indication to businesses to expand into the market and product line, whereas its decrease might result in rethinking and reframing business strategies.
· The marketing targeting process will help increase the ACV of a business and, in return, also fasten customer acquisition.
· The three most important factors that a business can benefit from ACV are:
– Businesses can monitor and track their team’s performances.
– Analyze the training efforts and make changes whenever required.
– Make more beneficial and strategic decisions.
Final Words on How ACV Helps In Measuring The Success Of Sales & Marketing Efforts
How quickly a business can grow is easily determined with the help of Annual Contract Value (ACV). ACV is a primary tool that helps businesses upgrade their threshold and grow spontaneously. It is a key element that enables businesses to know who provides the most value to the company. And the better businesses understand this, the better control they can have over the occurred impact.
FAQ’s
How do you calculate annual contract value?
Annual Contract Value (ACV) is quite easy to calculate.
The basic formula can be put as follows:
Total Revenue Generated from Subscription Contracts / Total Years in The Contract = ACV
Annual Contract Value (ACV) can be easily calculated for both short-term, as well as, long-term customers. Tracking ACV accurately can help businesses develop and optimize their marketing strategies in order to boost their overall business growth.
How do you define contract value?
Contract Value is essential in order to determine how much revenue a contract will bring over its lifetime. This also includes recurring expenses like service fees, hiring expenses, etc., and helps businesses estimate the amount of profit that they can generate from a particular contract.
Amol has helped catalyse business growth with his strategic & data-driven methodologies. With a decade of experience in the field of marketing, he has donned multiple hats, from channel optimization, data analytics and creative brand positioning to growth engineering and sales.
Don’t let the media or society define what success looks like for you. You know what you’re capable of, you the effort you’re putting in. You’ve got this 🙂 👍🏼
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