Key takeaways
- ACV is the recurring value of one contract divided by the years it runs.
- TCV is the whole contract over its full term, one-off fees included.
- ARR adds up all active customers; ACV describes one contract or an average deal.
- ACV bands shape the sales motion, the cost of sale a deal can carry and the length of the cycle.
How to calculate annual contract value
To calculate annual contract value, take the recurring value of the contract and divide it by the number of years it runs. Using made-up numbers, a three-year contract worth 90,000 in subscription fees has an ACV of 30,000, and a one-year contract at 24,000 has an ACV of 24,000.
Companies differ on one-off fees. Most leave setup and services out so ACV stays comparable with recurring revenue; some include them in the first year. Either is defensible, as long as the definition is written down and every team uses the same one. Ramped contracts, where the price rises each year, are usually averaged over the term.
ACV vs TCV: total contract value
Total contract value, or TCV, is the full value of a contract over its whole term, including one-off fees, while ACV is the yearly slice of the recurring part. The same three-year deal at 30,000 a year with a 5,000 setup fee has an ACV of 30,000 and a TCV of 95,000.
TCV is useful for bookings and for understanding how much a customer has committed to. ACV is better for comparing deals of different lengths, because a long contract does not make a deal look bigger than it is in any one year.
ACV vs ARR
ACV describes a single contract or the average new deal, while annual recurring revenue describes the whole customer base at a point in time. ARR is roughly the sum of the yearly recurring value of every active contract, so new deals add their ACV to it and cancellations take theirs away.
Sales teams talk in ACV because they sell one contract at a time. Finance and investors talk in ARR because it shows the size of the recurring business.
Why sales teams segment by ACV
Sales teams segment by ACV because the value of a deal decides how much selling effort it can pay for. A small contract cannot carry weeks of meetings with a field seller and a solutions engineer; a large one usually needs them.
- Low ACV: self-serve sign-up or a short, mostly online sale.
- Middle ACV: an inside sales team running demos and proposals by video call.
- High ACV: field or enterprise sellers, several buyers, security reviews and procurement.
- Quotas, commission and territories are often set by ACV band as well.
Common ACV mistakes
The common ACV mistakes make deals look larger or more alike than they are. Counting a multi-year contract as one year's value inflates the figure; using list prices instead of what the customer pays after discount does the same.
Averages also mislead. One very large contract can lift average ACV for a quarter, so read the median and the spread by segment before changing quotas or the sales motion.
Where Pebbles Ai fits
Common questions
Does ACV include one-off fees?
Usually not. Most companies count only recurring fees so ACV lines up with recurring revenue, but some include first-year setup fees; state which rule you use.
How do you work out ACV for a monthly plan?
Multiply the monthly charge by twelve. ACV is mostly used for annual and multi-year contracts, so many teams with monthly plans talk about monthly recurring revenue instead.
Is a higher ACV always better?
Not necessarily. Larger contracts tend to bring longer sales cycles, more people in the decision and a higher cost of sale, so the right ACV depends on the motion you can run.
About this page. Written by the Pebbles Ai team for people who run sales, marketing and growth. Last updated .
