ACV vs ARR
| Aspect | ACV (Annual Contract Value) | ARR (Annual Recurring Revenue) |
|---|---|---|
| Scope | Single contract value | Total company recurring revenue |
| Includes One-Time | Yes (implementation, setup) | No (recurring only) |
| Purpose | Deal sizing, sales comp | Company valuation, growth |
| Timing | At contract signing | Ongoing, updated monthly |
| Typical Use | Sales metrics, quota | Investor reporting, forecasting |
💡TL;DR
ACV = annual value of ONE deal (can include one-time fees). ARR = annual recurring revenue across ALL customers (excludes one-time fees). Example: $50k deal with $10k implementation = $50k ACV but only $40k ARR contribution. Use ACV for: sales quotas, deal analysis, pricing strategy. Use ARR for: company valuation, investor reporting, growth tracking. Common confusion: using ACV for valuation inflates numbers.
Definition
ACV (Annual Contract Value) is the total annualized value of a single contract, often including one-time fees like implementation or setup. ARR (Annual Recurring Revenue) is the sum of all recurring subscription revenue across all customers, excluding one-time fees. ACV is used for deal-level analysis; ARR is used for company-level metrics.
🏢What This Means for SMB Teams
SMB deals often have high services-to-subscription ratios (30-50% implementation fees). Track ACV for sales comp, but be clear about the ARR portion. Don't let high ACVs mask low recurring revenue.
Track MRR, churn, CAC payback—AI acts when metrics slip.
Metrics that matter, actions that move them.
📋Practical Example
A 40-person enterprise SaaS paid sales reps on ACV, which included $30k average implementation fees. Reps pushed large implementations to hit quota, but churn spiked because customers felt oversold. They restructured: (1) Quota based on ARR only, (2) Implementation fees as separate services bonus. Result: average deal size dropped 15%, but 12-month retention improved from 78% to 91%, and NRR increased from 95% to 108%.
🔧Implementation Steps
- 1
Define what's included in ACV: subscription + implementation + training + etc.
- 2
Separate recurring (ARR-eligible) from one-time (ACV-only) in every deal.
- 3
Track both metrics: ACV for sales performance, ARR for company health.
- 4
Set sales comp on ARR contribution, not total ACV.
- 5
Report to investors using ARR; use ACV for internal deal analysis only.
❓Frequently Asked Questions
Should implementation fees count toward sales quota?
Ideally, no. Counting implementation in quota incentivizes overselling services, which increases churn. Pay a separate bonus for services revenue, but base quota on ARR to align with long-term company health.
What's a typical ACV to ARR ratio?
For pure SaaS, it's close to 1:1 (minimal one-time fees). For enterprise SaaS with heavy implementation, ACV can be 1.3-1.5x ARR. If your ratio exceeds 1.5x, you may be over-reliant on services revenue.
⚡How Optifai Uses This
Optifai tracks both ACV and ARR at the deal level, automatically separating recurring and one-time components. Sales dashboards show quota attainment on ARR while highlighting total ACV for deal sizing.
📚References
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Related Terms
ACV (Annual Contract Value)
The average annualized revenue per customer contract. ACV = Total Contract Value ÷ Contract Years. For recurring business, it represents the annual subscription value excluding one-time fees. ACV guides sales strategy, compensation, and market positioning.
ARR (Annual Recurring Revenue)
The annualized value of recurring subscription revenue. ARR = MRR × 12. It represents the yearly run-rate assuming no growth or churn, used for valuation, planning, and investor communication.
MRR (Monthly Recurring Revenue)
The predictable revenue a SaaS company expects to receive every month from active subscriptions. MRR = Sum of (customers × monthly subscription price). It normalizes annual and monthly contracts into a single metric for tracking growth velocity.
Expansion Revenue
Additional recurring revenue from existing customers through upsells (higher tier), cross-sells (additional products), or seat expansion. Expansion Revenue = Ending MRR from Existing Customers - Starting MRR from Same Customers (excluding churn).
Sales Velocity
A metric measuring how quickly deals move through the pipeline and generate revenue, calculated as: (Number of Opportunities × Win Rate × Average Deal Size) / Sales Cycle Length.