Annual Contract Value (ACV) is the annualized value of a customer contract. If a customer signs a three-year deal worth $135,000 total, the ACV is $45,000. ACV normalizes contract values across different term lengths and is a key metric in SaaS and subscription businesses. According to SaaStr (2024), 89% of B2B SaaS companies use ACV as their primary sales metric.
The ACV formula is simple:
ACV = Total Contract Value ÷ Number of Years
For monthly contracts:
ACV = Monthly Value × 12
| Contract | Total Value | Term | ACV |
|---|---|---|---|
| Customer A | $18,000 | 1 year | $18,000 |
| Customer B | $90,000 | 3 years | $30,000 |
| Customer C | $2,250/month | Monthly | $27,000 |
When commission is based on ACV rather than total contract value (TCV), it creates a fairer distribution. Reps don't get disproportionately high commission for multi-year contracts—they're rewarded for the ongoing value they create.
According to OpenView's SaaS Benchmarks (2024), 73% of SaaS companies use ACV as the basis for commission calculations. This provides three benefits:
| Scenario | TCV | ACV | Commission (10%) |
|---|---|---|---|
| Commission on TCV | $90,000 | - | $9,000 |
| Commission on ACV | $90,000 | $30,000 | $3,000 |
Three acronyms often cause confusion:
| Term | Definition | Level |
|---|---|---|
| ACV | Annual value per contract | Single customer |
| ARR | Total annual recurring revenue | All customers |
| TCV | Total contract value over entire term | Single contract |
Example: A company has 50 customers with an average ACV of $22,500. ARR = 50 × $22,500 = $1,125,000.
According to Bessemer Venture Partners (2024), typical ACV varies significantly:
| Segment | Typical ACV | Sales Model |
|---|---|---|
| SMB SaaS | $2,000-$10,000 | Self-service / Inside sales |
| Mid-market SaaS | $10,000-$75,000 | Inside sales / Field sales |
| Enterprise SaaS | $75,000+ | Field sales / Named accounts |
Typically no. ACV focuses on recurring value. One-time fees like implementation, onboarding, or professional services are usually kept separate. Some companies use "Fully Loaded ACV" that includes everything.
ACV is always calculated after discounts. If list price is $30,000 but the customer gets a 25% discount, ACV is $22,500.
New ACV comes from brand-new customers. Expansion ACV comes from existing customers buying more (upsells, cross-sells, seat additions). Many companies track both separately to understand growth sources.
ACV is more than a reporting metric—it's the foundation for fair and predictable commission. When reps know their compensation is directly tied to the annual value they create, they understand exactly how effort translates to earnings.
With Prowi, you can automatically calculate ACV across contracts with varying terms and see how it affects commission in real time. It eliminates guesswork and creates transparency.