4 Examples of Annual Contract Value

John Spacey, October 10, 2018

Annual contract value, or ACV, is a measure of the value of a customer that includes both recurring revenue and one-time fees normalized to a yearly revenue figure. The following are illustrative examples.

Irregular Payments

A customer commits to a $30 million contract to build an office building. The length of the project is 3 years and payments are made based on project milestones at different stages of the project. Annual contract value is the total value of the contract divided by the duration of the contract in years.

ACV	= contract value / duration
	= $30 million / 3 years
	= $10 million

Recurring Revenue

A customer commits to paying a monthly recurring fee of $1000 for an internet leased line. The annual contract value is the value of 12 monthly payments.

ACV	= monthly recurring revenue × 12
	= $1000 × 12
	= $12,000

One-time Fees

Annual contract value differs from annual recurring revenue by its ability to incorporate irregular payments and one time fees. A one time fee may be included in the annual contract value for the year in which it occurs. Alternatively, a one time fee can be averaged over the length of the contract. This all depends on the purpose of your annual contract value measurement and the nature of the fee itself. The following are two alternative methods for calculating annual contract value for monthly recurring revenue of $1000 with a $3000 initial fee on a three year contract.

Method #1

Include the initial fee in first year annual contract value.

First year ACV	= (MRR × 12) + one time fees
	= ($1000 × 12) + $3000
	= $15,000

Method #2

Average the initial fee over the length of the contract.

ACV	= (MRR × 12) + (one time fee / contract length)
	= ($1000 × 12) + ($3000 / 3)
	= $11,000

Averages

Annual contract value is often expressed as an average for all customers. In many cases, this can simply be calculated by dividing revenue by the total number of customers. This may only include revenue that originates with a particular type of customer contract. Revenue used in this calculation may be either trailing revenue or a forecast of 12 month forward revenue based on signed contracts. For example, a software as a service firm may have revenue of $40 million from software subscriptions from 100,000 customers.

ACV	= revenue / # customers
	= $40,000,000 / 100,000
	= $400

Overview: Annual Contract Value
Type	Financial Analysis
Definition	A measure of the value of a customer that includes both recurring revenue and one-time fees normalized to a yearly revenue figure.
Related Concepts	Financial Analysis » Recurring Revenue » Annual Recurring Revenue »