What is annual contract value (ACV)?
Annual contract value (ACV) is the yearly subscription value of a customer contract: the recurring contract value divided by the number of years it covers, excluding one-time fees such as setup or implementation. Averaged across customers, ACV tells a B2B SaaS founder which sales motion and channels the business can afford.
ACV formula
For a monthly plan with no fixed term, the ACV is simply the monthly price × 12. Some companies fold first-year one-time fees into ACV; most don't. Pick one definition, write it down, and use it everywhere — especially in investor updates.
Worked example
A fictional HR software company signs three customers:
- Customer A: a three-year contract worth €30,000 in subscription fees, plus a €3,000 onboarding fee. ACV = €30,000 ÷ 3 = €10,000. The onboarding fee is excluded.
- Customer B: a one-year contract at €6,000. ACV = €6,000.
- Customer C: a monthly plan at €150. ACV = €150 × 12 = €1,800.
Average ACV = (€10,000 + €6,000 + €1,800) ÷ 3 = €5,933.
ACV vs ARR
ACV is measured per contract; ARR is the total recurring revenue of the whole company. In the example above, the three customers add €17,800 to ARR. ACV tells you what one customer is worth a year; ARR tells you how big the business is. And ACV is not total contract value (TCV): Customer A's TCV is €33,000.
Why ACV matters from €0 to €1M ARR
ACV is the number that decides which go-to-market motion can pay for itself. Brian Balfour calls this channel–model fit: a low price can't fund a sales team, and a high price is wasted on pure self-serve.
- Pre-revenue: your ACV is a hypothesis. Test it in customer interviews before you choose a motion, because the motion follows the price.
- Around €10k MRR: compare your intended ACV with what customers actually pay after discounts. If the gap is wide, your real motion may not be the one you planned.
- €50k+ MRR: ACV sets your hiring plan. It is also the fastest way to reach €1M ARR: at €2,000 ACV you need 500 customers, at €20,000 you need 50.
Common ACV mistakes
- Including one-time fees. Setup and services revenue doesn't recur, so it inflates ACV and every forecast built on it.
- Quoting list price. Use what customers actually signed. Investors flag ACV that's heavily discounted to close.
- Averaging very different segments. Ten €1,000 customers and one €40,000 customer average €4,545 — a price nobody pays. Report ACV by segment.
- Picking a motion before knowing ACV. Hiring an account executive for a €1,500 product is the classic mismatch.
Willingness-to-Pay Test
Not sure your ACV is right? Design a 7-day willingness-to-pay test based on real commitment, like a pre-order or paid pilot, not survey answers.
Use it free →FAQ
What is the difference between ACV and ARR?
Does ACV include setup or implementation fees?
How do you calculate ACV for monthly subscriptions?
Who wrote this
Madalena Rugeroni built Mazo. She's an ex-Googler, a startup advisor and investor, and runs a portfolio of internet companies. Before that, as Head of Growth at Amplemarket, she scaled a B2B SaaS to $10M ARR. LinkedIn
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Start 14-day free trial Browse the full go-to-market glossary →Further reading. Operators and books referenced: Brian Balfour (channel–model fit). These are published methodologies credited to their authors; Mazo is not affiliated with or endorsed by them.