Average contract value, or ACV, is a sales metric is especially useful for SaaS companies that have multi-year contracts with their customers.

While often used interchangeably with annual contract value, it more accurately represents the normalized annual revenue derived from customer contracts, even those spanning multiple years.

ACV is calculated by dividing the total contract value by the contract duration in years. For instance, a three-year contract worth $36,000 would have an ACV of $12,000.

Formula: ACV = Total Contract Value (TCV) / Contract Duration (Years)

ACV is an important indicator of a company's financial health and growth potential. It reflects the value customers perceive in the product or service, the effectiveness of pricing strategies and the overall revenue generation capacity of the business.

Monitoring and analyzing ACV can also help companies identify opportunities for upselling, cross-selling, optimizing their pricing models or reassessing the features offered to different customer segments.