How to calculate ACV and ARR
Remember, it’s okay if your company or sales department interprets ACV or ARR slightly differently from other organizations so long as everyone involved is on the same page, and calculates them in the same way.
How to calculate ACV
Here’s the standard formula for calculating ACV for a single account.
ACV = Total contract value ÷ Number of years
If, for example, Customer A signs a three-year annual subscription contract with the total value of the contract sitting at $1500, the ACV calculation would look like this.
ACV = $1500 ÷ 3 = $500
If Customer B commits to a more expensive subscription plan on a five-year contract worth $4500, the ACV calculation would look like this.
ACV = $4500 ÷ 5 = $900
But what happens if Customer C opts for a two-year, monthly subscription contract at $100 per month? Here’s how you could use the ACV formula to normalize the customer’s contract over one year.
Annual subscription rate = $100 x 12 months = $1200
Total contract value = $1200 x 2 years = $2400
ACV = $2400 ÷ 2 = $1200
It should be clear now why the answer to “what is ACV in sales?” is “a quick way to compare various types of recurring revenue accounts”.
Calculating ACV across multiple contracts
Some companies find creative ways to use ACV to make certain data easier to view and digest.
For example, here’s a simple formula you could use to gauge the average ACV of multiple contracts.
Average ACV = Total ACV of contracts ÷ Number of contracts
There are a couple of ways you can put this calculation to work. Let’s look at both.
With this method, you calculate the ACV for each of your accounts individually, then add those amounts together and plug the result into the formula above.
- Customer A has an ACV of $1000
- Customer B has an ACV of $2000
- Customer B has an ACV of $6000
Total ACV of contracts = $9000 ($1000 + $2000 + $6000)
Average ACV = $9000 ÷ 3 = $3000
If, on the other hand, you’ve signed a lot of customers with a wide range of contract terms, it can be easier to batch your calculations.
Let’s say you currently have ten customers with different subscription contracts, and you want to know your average ACV for all ten accounts.
- Two are on one-year contracts worth $30,000 each
- Five are on three-year contracts worth $60,000 each
- Three are on five-year contracts worth $100,000 each
First, you’d batch-calculate the ACVs for each contract.
ACV = $30,000 ÷ 1 year = $30,000 x 2 contracts = $60,000
ACV = $60,000 ÷ 3 years = $20,000 x 5 contracts = $100,000
ACV = $100,000 ÷ 5 years = $20,000 x 3 contracts = $60,000
Next, you’d tally the total ACV for all your contracts.
Total ACV = $60,000 + $100,000 + $60,000 = $220,000
Finally, you’d plug that result into your formula.
Average ACV = $220,000 ÷ 10 = $22,000
By performing this calculation, you’d essentially discover that each of your customer contracts is worth $22,000 on average this year. Next year, however, if your one-year contracts don’t renew, or if you acquire additional clients, your average ACV will be different.
It’s worth noting that there’s no industry benchmark for ACV, since high or low results are neither good nor bad. That’s why ACV offers the most value when you team it up with other revenue or sales metrics, like ARR.
How to calculate ARR
There’s a fast, easy method for calculating ARR and the standard, more accurate method.
The simplest way to determine your ARR is by subtracting your non-recurring income from your annual revenue (meaning the total amount of money your company made in a fiscal year before expenses are deducted) for the previous year.
ARR = Total annual revenue – Non-recurring revenue
This will give you a quick, general idea of what your ARR looks like. What this ARR formula doesn’t take into account, however, is how customer subscriptions may have changed in the meantime.
SaaS businesses in their first year of operation may use the annual run rate, instead of annual recurring revenue, to make revenue forecasts, as they may not have enough data to work with.
Here’s the standard formula for calculating ARR.
ARR = ARR at the beginning of the year + ARR gained from new customers + ARR gained from subscription upgrades – ARR lost to subscription downgrades – ARR lost to customer churn
Let’s say you have 100 annual customer subscription contracts on the first day of January, each yielding $1200 in recurring revenue.
If nothing changed over the coming months (and assuming you didn’t have any non-recurring revenue), your ARR would remain equal to your total annual revenue from the previous year - or $120,000 (100 x $1200).
As the year unfolds however, let’s say your company:
- Gains 20 new $1200 customer subscriptions (20 x $1200 = $24,000)
- Upsells 10 existing customers to $1800 subscriptions (10 x $600 = $6000)
- Has 10 existing customers downgrade to $800 subscriptions (10 x $400 = $4000)
- Has 3 existing customers cancel their subscriptions (3 x $1200 = $3600)
To determine your ARR in real time, you could plug these events into your formula as they occur. In this example, overall results indicate that, with new and upgraded contract amounts outweighing downgrades and churn, your company is on a positive growth trend.
ARR = $120,000 + $24,000 + $6000 - $4000 - $3600 = $142,400
If your company works mostly with monthly subscription fees, you can calculate your MRR (monthly recurring revenue) following the same formula described above, then multiply that result x 12 to arrive at your ARR value.
Tools to help analyze your metrics
If you’re feeling a little overwhelmed by the idea of manipulating ACV, ARR and other revenue metrics, you’ll be pleased to know that analytics tools exist to make your job easier.
With the Plecto and Pipedrive integration, for example, you can display your real-time sales data inside a CRM like Pipedrive for an unbeatable overview of your business performance.
Pipedrive’s recurring revenue feature, meanwhile, makes it easy to:
- Track all your subscriptions and repeat customers
- Set up separate recurring revenue streams
- View the growth in new or canceled recurring revenue payments
Tracking recurring revenue with the help of a CRM tool gives you a solid foundation of data you can use to upsell, cross-sell, tweak your subscription costs or measure your ACV sales results.