If you run a SaaS business, you’ve probably heard of ARR (Annual Recurring Revenue) and ACV (Annual Contract Value). They sound alike and are often used interchangeably, but they measure very different things.
ARR tells you how much predictable revenue your company generates every year. ACV shows the average annual value of a customer contract. Both metrics are essential — ARR for forecasting and valuation, ACV for sales performance and deal benchmarking.
In this guide, we’ll break down ARR vs ACV step by step, show you formulas and examples, and explain when to use each metric so you can make smarter business and investor decisions.
Why ARR and ACV Get Confused
In SaaS, two metrics often get mixed up: Annual Recurring Revenue (ARR) and Annual Contract Value (ACV). They sound similar, but they serve very different purposes.
- ARR tells you how much predictable recurring revenue your business generates in a year.
- ACV shows the average annual value of a customer contract.
If you confuse them, you may overstate revenue or mislead investors. Get them right, and you’ll be able to track growth, benchmark sales efficiency, and model valuations with confidence.
👉 Want to see how ARR impacts valuation? Use the SaaS Valuation Calculator.
What Is ARR (Annual Recurring Revenue)?
ARR = MRR × 12
It measures all recurring subscription revenue that renews annually. ARR is used by:
- Founders and CFOs for growth forecasting
- Investors for valuation multiples
- Boards for long-term planning
✅ Include: subscriptions, recurring add-ons, usage-based charges if consistent
❌ Exclude: setup fees, consulting, one-time projects
👉 Run your numbers quickly with the Annual Recurring Revenue Calculator.
What Is ACV (Annual Contract Value)?
ACV = Contract Value ÷ Contract Years
It reflects the average annual value of a customer contract, often used by sales teams.
Example:
- 3-year contract worth $60K → ACV = $20K per year
- 1-year $12K contract → ACV = $12K
ACV is useful for:
- Measuring average deal size
- Benchmarking enterprise vs SMB contracts
- Evaluating sales team performance
👉 Use the Equity Dilution Calculator to see how ACV and ARR affect funding strategy.
ARR vs ACV: Side-by-Side Comparison
| Metric | ARR | ACV |
|---|---|---|
| Definition | Annual recurring revenue from subscriptions | Annualized value of a single contract |
| Focus | Predictable, company-wide revenue | Sales efficiency and deal size |
| Formula | MRR × 12 | Total contract ÷ years |
| Use Case | Valuation, forecasting, financial planning | Sales benchmarking, customer segmentation |
| Includes Churn/Expansion? | Yes | No |
👉 Model revenue outcomes with the Revenue Forecasting Calculator.
Real-World Example: $60K Contract Over 3 Years
- ARR: $20K/year added to recurring revenue
- ACV: $60K contract value (average $20K per year, but tracked as one deal)
This shows how ARR measures predictability across the whole business, while ACV looks at the size of individual contracts.
When to Use ARR vs ACV
- Use ARR when talking to investors, building forecasts, or comparing against SaaS valuation multiples.
- Use ACV to track sales performance, segment customers, and benchmark deal sizes across different markets.
Both matter — but they answer different questions.
Common Mistakes to Avoid
- Counting one-time fees in ARR
- Reporting ACV as recurring revenue
- Not adjusting ARR for churn and expansion
- Using ARR and ACV interchangeably in investor reports
FAQs on ARR vs ACV
1. Can ARR and ACV ever be the same?
Yes, if every contract is one year long, ARR and ACV may align.
2. Does ARR include churn and expansion?
Yes, ARR grows with upgrades and shrinks with churn.
3. Why do investors prefer ARR over ACV?
ARR shows predictable revenue; ACV only reflects contract size.
4. Which teams use ACV more?
Sales and account management teams use ACV to benchmark deals.
5. How do multi-year contracts affect ARR and ACV?
ARR annualizes them, while ACV reflects the entire deal value.