Average Contract Value: Formula, Examples & How to Improve

What Is Average Contract Value (ACV)?

Average Contract Value (ACV) is the average revenue generated per customer contract over a defined period (typically annually). It helps businesses assess the value of individual customer deals and optimize pricing strategies.

Why ACV Matters:

1. Revenue Forecasting – Helps predict long-term revenue trends.
2. Customer Segmentation – Identifies high-value vs. low-value customers.
3. Sales & Marketing Alignment – Guides strategies to acquire and retain high-value clients.
4. Pricing Optimization – Helps refine pricing models for profitability.

👉 Example: A SaaS company with five contracts worth $50,000, $75,000, $100,000, $125,000, and $150,000 annually would have an ACV of $100,000.

How to Calculate Average Contract Value (ACV)

The formula for ACV depends on the contract length:

Standard ACV Formula (Annual Contracts):

ACV = Total Contract Value / Number of Years​

Example Calculation:

1. A SaaS company closes a 3-year contract worth $150,000.
2. Using the formula: ACV = $150,000 / 3 = $50,000
3. The ACV for this contract is $50,000 per year.

ACV for Multiple Contracts:

ACV = Total Revenue from All Contracts / Total Number of Contracts

👉 Example:

1. Company A has 10 contracts totaling $1,000,000 annually.
2. ACV = $1,000,000 ÷ 10 = $100,000.

ACV vs. Other Metrics

How to Increase Average Contract Value (ACV)

1. Upsell & Cross-Sell Existing Customers

Expanding the contract size by offering premium features, add-ons, or additional services can increase ACV.

Strategies:

1. Introduce tiered pricing models with exclusive benefits for higher plans.
2. Offer bundled services that provide more value at a higher price.
3. Use data-driven insights to personalize upgrade recommendations.

👉 Example: A CRM software company increases ACV by upselling an AI-powered analytics tool to its standard customers.

2. Target Higher-Value Customer Segments

Focusing on enterprise-level customers rather than small businesses can increase ACV since larger businesses have higher budgets and longer contract commitments.

Strategies:

1. Adjust sales targeting to focus on mid-market and enterprise clients.
2. Develop customized solutions for higher-tier customers.
3. Offer volume-based pricing or discounts for longer commitments.

👉 Example: A cybersecurity firm shifts focus from small businesses ($10,000 ACV) to large enterprises ($75,000 ACV).

3. Increase Contract Length

Encouraging customers to commit to longer contracts stabilizes revenue and boosts ACV.

Strategies:

1. Offer discount incentives for multi-year contracts.
2. Highlight the long-term value and cost savings of extended commitments.
3. Provide exclusive loyalty benefits for long-term customers.

👉 Example: A SaaS company offers a 10% discount for switching from a 1-year to a 3-year contract, increasing ACV.

4. Improve Sales & Negotiation Strategies

Sales reps should be trained to sell value over price and maximize deal size.

Strategies:

1. Focus on consultative selling rather than price-based selling.
2. Train sales teams to identify high-value customer pain points.
3. Use case studies and ROI calculations to justify higher contract values.

👉 Example: A project management tool increases ACV by shifting sales conversations from cost to productivity improvements, leading to bigger deals.

5. Offer Customization & Premium Support Packages

Adding custom features, integrations, or premium support services can encourage customers to opt for higher-tier contracts.

Strategies:

1. Introduce white-label or custom integration solutions.
2. Offer dedicated account managers or priority support for high-tier plans.
3. Develop industry-specific solutions that cater to niche markets.

👉 Example: A SaaS company adds a VIP customer support package for an additional $5,000 per year, increasing ACV.

6. Streamline Renewal & Expansion Strategies

Encouraging renewals with added benefits ensures existing customers continue increasing contract values.

Strategies:

1. Offer contract expansion incentives for adding more users or services.
2. Send renewal reminders with special upgrade offers.
3. Provide an auto-renewal option for convenience.

👉 Example: A cloud storage provider offers a 20% discount on additional storage for renewing customers, boosting contract size.